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Hewlett-Packard, the world's largest personal-computer maker, is close to a deal to buy technology outsourcing company Electronic Data Systems for $12 billion to $13 billion, a source briefed on the matter said Monday.
HP confirmed it was in talks with EDS about a business combination but said it would give no more details until an agreement is reached or discussions terminated.
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EDS shares [EDS
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] rose nearly 28 percent to $24.13 on the New York Stock Exchange, taking its market value to about $12 billion, before trading was halted.
HP shares [HPQ
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] fell nearly 5 percent to $46.74.
Such a deal would boost HP's competitiveness against International Business Machines [IBM
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] in the computer services market, a sector that offers relatively stable income and high margins even in an economic downturn.
"While Hewlett-Packard has over time built up its own outsourcing practice, this clearly is a move by Mark Hurd to challenge IBM in the services area," said David Garrity, director of research at Dinosaur Securities, referring to HP's chief executive.
The source, who declined to be identified because the talks were confidential, said the companies planned to announce a deal by the close of Tuesday.
EDS could not be reached for comment.
HP has long considered an acquisition to beef up its services business. In 2000 it pulled out of talks to buy the consulting business of PricewaterhouseCoopers for as much as $18 billion.
IBM in October 2002 closed its $3.5 billion acquisition of PricewaterhouseCoopers' consulting division.
EDS reported in April a sharp 62 percent drop in first quarter profit, though the results had topped Wall Street expectations.
Despite the beat, analysts said EDS faced intense competition from Indian rivals and saw little catalyst for growth.
Besides HP and IBM, EDS also competes with Accenture and Computer Sciences in the United States, as well as Indian companies Infosys Technologies, Tata Consultancy Services and Cognizant Technology Solutions.
"EDS has been relatively stagnant over the past few years," said Chad Hersh, analyst at Novarica. "HP has been trying to promote themselves as a major services organization over the past few years. This will certainly help them with that."
The news was first reported by the Wall Street Journal on its Web site.
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