05/13/08 UPDATE: HP has agreed to buy EDS for $13.9 billion

Hewlett-Packard has confirmed it is in talks to acquire IT services company Electronic Data Systems in a deal that would give it more competitive muscle against worldwide services market leader IBM.(Catch up on 2008's hottest tech M&A deals to date.)

The price tag for EDS could be around US$13 billion, according to a report in the Wall Street Journal published on Monday.

EDS declined to comment at this time.

The deal would strengthen HP's competitive position against IBM, whose Global Technology Services division has long been a strong profit generator for the company.

"I see it as an attempt by HP to really go head to head with IBM in a much more meaningful way, especially in technology services and IT outsourcing, said Dana Stiffler, research director with AMR Research.

Even after the merger, however, the combined companies' global services revenue would fall about $10 billion short of that of IBM, based their figures reported for 2007, she said.

The market at stake was worth $672.3 billion worldwide in 2006, a 6.4 percent increase from 2005 according to a Gartner study released about a year ago. While IBM led the market with about $48 billion in revenue compared to second-place EDS with about $21 billion, EDS' 7.6 percent growth outpaced IBM's 1.8 percent growth. HP took in about $16 billion in services revenue and grew 2.1 percent between 2005 and 2006.

The deal would strengthen HP's services capability in some areas but not others. EDS would give HP a boost in custom application services and infrastructure management services, but less so in managing packaged applications from the likes or Oracle and SAP, Stiffler said.

"Another thing it wouldn't give HP is a strong business consulting presence, a go-to-market capability where you address operational executives and line of business people as much as the CIO," she said.

EDS may well be open to an acquisition though, according to Stiffler. "I think aligning themselves to HP makes them potentially a more future-focused and viable competitor than they are as a standalone company," she said.

There is a challenge for both companies. "Both HP and EDS grew up in a traditional world prior to India emerging as a global delivery center," Stiffler said, noting that Indian companies such as Wipro are focused on providing low-cost application development services.

The IDG News Service is a Network World affiliate.

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