HP Dons Kid Gloves for the EDS Deal

• Email
• Share
• Print

Listen up, merger maniacs. If Microsoft's (Nasdaq: MSFT) failure to pick up Yahoo! (Nasdaq: YHOO) has you singing the blues, there's a new blockbuster deal on the block -- and no, I'm not talking about Blockbuster (NYSE: BBI) cuddling Circuit City (NYSE: CC). Surely you didn't take that "blockbuster deal" literally? (And stop calling me Shirley.)

No, computing titan Hewlett-Packard (NYSE: HPQ) is doing the buying this time, turning last night's rumor into today's news. HP is paying $13.9 billion, or $25 per share, in cold hard cash to pick up support service provider Electronic Data Systems (NYSE: EDS). Going by last year's numbers, this acquisition will more than double HP's service revenue into the mid-$30 billion range and make the merged company look a lot more like the big blue one-stop-shop we know as International Business Machines (NYSE: IBM).

Our faithful CAPS players have already started to weigh in on the deal, with opinions ranging from "a great opportunity" to jump into the high-margin services market with both feet to "EDS is crap, and H-P is overpaying."

Others worry that the merger will run into culture clashes of the kind that turned Carly Fiorina's infamous takeover of Compaq into more of a disaster than a kingmaking moment, eventually costing Carly her job. But HP is taking steps to avoid repeating that mistake by keeping the EDS division separated from HP proper, and maintaining its Texas headquarters and its old CEO.

I think that's smart management of a tricky situation. It's easy to come up with examples of other megamergers that could have used a lighter touch, and this approach could serve as a model for other presumptive acquirers. Someday, EDS may act and feel like a proper HP component, but until then, it's best to let the components get used to each other from afar.

Further Foolishness:

• Hewlett-Packard ... Hungry!
• EDS Feels Tedious
• Innovate Your Way to Higher Returns