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Peter A. Sokoloff & Co. regularly analyzes transactions which occur within the industries covered. An archive of these case studies is kept online as a courtesy to our colleagues. To receive by e-mail new case studies as they are prepared, please e-mail bwalko@sokoloffco.com with your contact information.

Archives > Transaction Case Study 32

HP to acquire EDS

Dear Colleague,

On May 13, 2008, Hewlett Packard and Electronic Data Solutions announced that they have signed a definitive agreement to purchase EDS approximately $13.9 billion (enterprise value). This is a price of $25.00 per share of common stock, a 32% premium over the price prior to news of the deal hitting the street.

The acquisition is an apparent bid to further emulate the successful model that Lou Gerstner built with IBM. Gerstner’s concept of a “unified enterprise” which would leverage all of the pieces of IBM--hardware, services and software, to deliver top-to-bottom technology solutions, was a monumental decision in the IT world. With the acquisition of EDS, HP is similarly and aggressively bolstering its ability to compete globally with IBM, as well as the likes of Accenture and other ‘services only’ shops.  The combined firms will provide extensive experience in offering total solutions to customers in the areas of government, healthcare, manufacturing, financial services, energy, transportation, communications,  consumer industries and retail.

Based on the public information of EDS for the trailing twelve months, HP is paying approximately 5.7x EBITDA ($2.42 billion), .62x revenue ($22.28 billion) and just over 1x Enterprise Value ($12.69 billion).  On May 12th, as news broke that an announcement was pending, EDS’s share price soared from $18.95 to as high as $25.40 before settling back to close at $24.13.  Trading volumes soared from less than 3 million shares daily to 13.5 million shares on the widely reported leak the day before the official announcement.  During the 13th and the 14th, some 211 million shares were traded.

On the other hand, the initial public response to a potential transaction on May 12, resulted in HP’s price per share going from $49.39 to $46.83 at the close.  Additionally, on May 13th it closed at $44.27, a 10.4% decrease compared to the opening price on May 12th.  As of May 20th, the price per share had recovered somewhat to $46.46.

EDS (NYSE: EDS) founded the information technology outsourcing industry more than 45 years ago and delivers a broad portfolio of information technology and business process outsourcing services to clients in the manufacturing, financial services, healthcare, communications, energy, transportation, and consumer and retail industries and to governments around the world.

HP (NYSE: HPQ) is among the world's largest technology companies that focuses goods and services (printing, personal computing, software, services and IT infrastructure) for customers - from individual consumers to the largest businesses. They had revenue totaling $107.7 billion for the four fiscal quarters ended Jan. 31, 2008.

The transaction is expected to close in the second half of calendar year 2008 and to more than double HP's services revenue, which amounted to $16.6 billion in fiscal 2007. The companies' collective services businesses, as of the end of each company's 2007 fiscal year, total annual revenues of more than $38 billion, with 210,000 employees, doing business in more than 80 countries.  HP anticipates that the transaction will be accretive to fiscal 2009 non-GAAP earnings and accretive to 2010 GAAP earnings.

"The combination of HP and EDS will create a leading force in global IT services," said Hurd. "Together, we will be a stronger business partner, delivering customers the broadest, most competitive portfolio of products and services in the industry. This reinforces our commitment to help customers manage and transform their technology to achieve better results."

Rittenmeyer said, "First and foremost, this is a great transaction for our stockholders, providing tremendous value in the form of a significant premium to our stock price. It's also beneficial to our customers, as the combination of our two global companies and the collective skills of our employees will drive innovation and enhance value for them in a wide range of industries. In addition, our Agility Alliance will be significantly strengthened."

HP intends to establish a new business group, to be branded EDS - an HP company, which will be headquartered at EDS's existing executive offices in Plano, Texas. HP plans that EDS will continue to be led after the deal closes by EDS Chairman, President and Chief Executive Officer Ronald A. Rittenmeyer, who will join HP's executive council and report to Mark Hurd, HP's chairman and chief executive officer.

The terms of the transaction have been unanimously approved by the HP and EDS boards of directors. The acquisition is subject to customary closing conditions, including the receipt of domestic and foreign regulatory approvals and the approval of EDS's stockholders.

We hope that you find this feature from Sokoloff & Co. interesting, informative and useful.  We welcome your comments and suggestions.

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