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H-P In Talks To Buy EDS; No Word Yet On Whether Numbers Compute


Hewlett-Packard ponders Electronic Data Systems purchase.


Late in the trading day Monday, news came across the tape that California-based Hewlett-Packard (HPQ) is in talks to purchase Electronic Data Systems (EDS), a Texas-based technology outsourcing company.

According to Bloomberg, Hewlett-Packard confirmed the negotiations and might pay as much as $13 billion for Electronic Data Systems. Moreover, the article stated that the acquisition "would more than double Hewlett-Packard's annual sales in its services unit to almost $40 billion." This could also allow it to better compete with IBM (IBM).

Cutting right to the chase, there are some pros and cons to this potential deal.

First the pros:

H-P isn't new to making sizable acquisitions. You'll remember that it scooped up Compaq for about $19 billion or so back in May 2002. It also purchased Mercury Interactive for $4.5 billion back in 2006. Long story short, while Electronic Data Systems would be a big fish for H-P to swallow, it has arguably proven it has the potential to handle it.

Moreover, H-P seems to have the financial wherewithal to consummate such a deal. More specifically, it has cash (and equivalents) of about $9.9 billion as of this past January. It could also use its stock, which is roughly in the middle of its 52-week trading range, as currency. In short, it would be good to see the company spend some of that money to build out its business and to try to compete with Big Blue.

Proponents of the combination also argue that joining forces could allow H-P to land more government deals. Finally, one could assert that the Street has been waiting for H-P's next big move (in terms of growing its business). This seems to fit that bill and could possibly be a catalyst for the stock going forward.

And the cons:

Frankly, $12 to $13 billion is no small potatoes. To that end, if something were to go wrong and H-P were to acquire something it doesn't like, it could prove quite costly. Some have also wondered if the money could be better spent elsewhere. After all, it's important to note that Electronic Data Systems is coming off a pretty difficult first quarter; it doesn't exactly seem to have momentum in its favor.

In sum, a deal looks like it would be a net positive for H-P and its shareholders. While it would cost a pretty penny, it would also seemingly give it clout to better deal with IBM - a time-consuming and costly undertaking if it decided to go it alone.

Note: The word is we could see a deal inked before the end of the day.

No positions in stocks mentioned.

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