User 49180

HP’s Acquisition of EDS Makes Sense

The acquisition of EDS may prove valuable to HPQ in the long run but could lead to p/e compression and a lower than otherwise HPQ stock price in the near term. HPQ's Gross margin was just under 25% last year compared to just under 42.5% for IBM which has shed lower margin business segments like PC's over the last several years. EDS' gross margin was just under 14% last year and adding another relatively low margin book of business to HPQ's big PC business should keep HPQ Gross Margin sub 25%.

In addition, many big EDS customers use IBM hardware and may want to transition to IBM's new Power6 equipment. The acquisition may provide marketing opportunities for IBM to characterize HPQ/EDS as a "middleman".