HP's EDS Purchase Will Spur Tech M&A

Hewlett-Packard Co.'s (HPQ) $13.9 billion purchase of IT outsourcer Electronic Data Systems Corp. (EDS) will likely shake up the sluggish high-tech M&A climate on many fronts, establishing HP as a successful acquirer of multibillion dollar businesses that could eventually pursue other large targets, while potentially spurring rival IBM Corp. (IBM) to explore purchases to solidify its shrinking lead in IT services.

As the largest high-tech acquisition so far this year, HP's $25-per-share purchase of Plano, Texas-based EDS may also wake up other high-tech companies to the compelling values to be had now that stock prices are low, analysts said.

"In a recessionary climate, the reality is that many of these properties are pretty cheap," said Rob Enderle, principal analyst at Enderle Group in San Jose, Calif. Enderle said larger acquisitions that emphasize acquiring people become particularly attractive in a weak economy, because a soft job market makes it more likely the target's employees would stay, minimizing one key integration challenge.

HP's $25 per share purchase price represents a 32.9% premium EDS' share price on May 9, but it is still considerably cheaper than EDS' market capitalization over much of the past year, and significantly below EDS' 52-week high of $29.13 per share. Coming on the heels of Microsoft Corp.'s (MSFT) abandoned $47.5 billion bid for Yahoo! Inc. (YHOO), this message about the values in the high-tech sector resonates.