HP has eye on IBM as it discusses EDS acquisition

Having seized the lead in personal computer sales worldwide, Hewlett-Packard Co. is stalking the technology services market for its next conquest.

In what could turn into its biggest deal in six years, HP hopes to buy Electronic Data Systems Corp., which pioneered the concept of running data centers and providing other high-tech help for large companies and government agencies.

Palo Alto-based HP and Plano, Texas-based EDS confirmed Monday that they are in "advanced discussions" about a possible combination without providing additional details.

Citing unnamed people familiar with the matter, The Wall Street Journal reported Monday that HP is willing to pay $12 billion to $13 billion _ a price that translates to $24 to $26 per share.

EDS shares soared $5.27, or nearly 28 percent, to finish Monday at $24.13. HP shares dropped $2.49, more than 5 percent, to close at $46.64 as investors fretted over the deal's logistics.

HP ended January with nearly $10 billion in cash. With a market value of about $115 billion, HP could easily use its own stock to finance the purchase.

If the deal is completed, it would be HP's biggest acquisition since it bought Compaq Computer Corp. for $19 billion in 2002. That acquisition paved the way for HP to supplant Dell Inc. as the world's largest PC maker.

Buying EDS would give HP more tools to challenge IBM Corp. in the lucrative technology services field. HP already has replaced IBM as the world's largest technology company, based on revenue.

The demand for data management and technology consulting services has steadily grown during the past two decades as the automation of corporate America and the rise of the Internet prompted more businesses to hire contractors to help run their computer software and hardware.

IBM's technology services division brought in $54 billion in revenue last year, accounting for half of the company's total sales. Combined, EDS and HP's technology services division had about $39 billion in revenue last year.

In one of its biggest previous attempts to expand its technology services, HP attempted to buy PricewaterhouseCoopers' consulting division in 2000. IBM wound up buying the unit instead.

HP has been on a roll since it hired Mark Hurd as chief executive three years ago. Propelled by earnings growth that has consistently exceeded analyst expectations, the company's stock price has more than doubled since Hurd's arrival.

Acquiring EDS could yield more government work for HP, which had about $500 million in prime federal contracts in fiscal 2007. EDS is far better connected, with deals worth about $2.5 billion _ putting it among the top 10 among government technology contractors.

Combined, HP and EDS still would lag significantly behind government contractors like Lockheed Martin Corp. and Boeing Co.

As in many corporate marriages, cultural clashes between HP and EDS could ruin the union, said AMR Research analyst Dana Stiffler. "Palo Alto versus Plano wrangling will destroy any short-medium term benefit unless there's a strong integration roadmap," she predicted.

HP earned $7.3 billion on $104 billion in revenue last year while EDS made $716 million on $22.1 billion in revenue.

EDS has been linked with possible deals previously, including a reported interest by Deutsche Telekom late last year and Dell before that. No suitors ever confirmed reports that they were talking.

Former IBM salesman H. Ross Perot started EDS in 1962 to help run other companies' computer systems _ a specialty generally known as information-technology or IT services.

Perot sold EDS to General Motors Corp. for $2.5 billion in 1984 and eventually became so disillusioned with how that deal worked out that he sold his remaining EDS shares to the automaker so he could start a new rival service bearing his name.

An outspoken billionaire, Perot became even more famous for running for U.S. president in 1992 and 1996. GM spun off EDS as an independent company in 1996 and remained its largest customer.

EDS was riding high at the start of the decade, despite the dot-com bubble's bursting. But in late 2002, earnings shortfalls led to investor lawsuits, a Securities and Exchange Commission investigation, the ouster of the chief executive, and a sharp drop in the stock price.

The company lost $1.7 billion in 2003 but gradually righted itself under CEO Michael Jordan, a retired CBS and Westinghouse CEO. He fixed some money-losing contracts, including a multibillion-dollar deal to build a communications network for the Navy and Marine Corps, and began cutting costs by sending thousands of jobs to low-cost countries such as India.

Although he hasn't seen any signs to suggest EDS has been looking for a buyer, Jefferies & Co. analyst Joseph Vafi said the company's board might have decided a sale would create a quicker payoff for shareholders than continuing to try to grow the company in the highly competitive technology services industry.

Under Hurd's leadership, HP bought business software maker Mercury Interactive Corp. for $4.9 billion in 2006 and last year paid $1.7 billion for data management service Opsware Inc., which had sold a large chunk of its operations to EDS in 2002.

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AP Business Writers David Koenig in Dallas and Dibya Sarkar in Washington, D.C., contributed to this report.