HP to buy EDS for $13.9 billion

NEW YORK (CNNMoney.com) -- Hewlett-Packard announced Tuesday it is buying Electronic Data Systems for about $13.9 billion in cash, as it aims to step up competition for the computer services business with rival IBM.

HP (HPQ, Fortune 500) is paying $25 a share for EDS (EDS, Fortune 500), a narrow 4% premium to Monday's close but a nearly one-third premium over Friday's closing price of $18.86 a share before reports of a possible deal lifted EDS shares 27% in Monday trading.

The $13.9 billion price is the enterprise value of the transaction; the cost of the deal for HP is $12.8 billion when comparing the price to EDS shares outstanding.

Shares of HP fell 1.5% in premarket trading, while EDS shares gained another 0.9%.

It is the largest purchase for HP since its controversial purchase of Compaq Computer in 2002. It should also allow HP to close much of the gap in lucrative computer consulting business with IBM (IBM, Fortune 500).

EDS is the largest independent systems management and services provider in the nation, and is second in the business only to IBM. It was founded by Ross Perot in 1962, and remained independent until General Motors (GM, Fortune 500) bought it in 1984, a combination that lasted until a 1996 spin-off.

HP said it plans 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. EDS CEO Ronald A. Rittenmeyer is to stay with the company to run the new unit.

HP also reported preliminary results for its fiscal second quarter, saying that it earned 87 cents a share excluding special items, up from 70 cents on that basis a year earlier. That's better than the 84-cent-a-share forecast of analysts surveyed by earnings tracker Thomson First Call.

Including special items, primarily the accounting for the purchase of some intangible assets, the company earned 80 cents a share in the quarter, up from 65 cents a share. Revenue rose to $28.3 billion compared with $25.5 billion, which also edged past the First Call forecast of about $28 billion.

The company said its purchase of EDS is expected to close in the second half of this year and that it should add to earnings per share, excluding special items, in the fiscal year that ends in October 2009.

HP also raised its revenue target for the fiscal year that ends this October to between $114.2 billion to $114.4 billion, up from $113.5 billion to $114 billion. It projected that earnings per share excluding special items this year should be between $3.54 to $3.58, up from its earlier guidance of $3.50 to $3.54, and better than First Call's forecast of $3.52 a share.

It also upped its net income per share guidance to between $3.30 to $3.34, up from its previous estimate of $3.26 to $3.30.