Upgrading EDS on H-P News

On May 13th, Hewlett-Packard (HPQ - Analyst Report) announced that it would acquire Electronic Data Systems (EDS) for $25.00 per share in cash, or a total of $13.9 billion. The deal is expected to close in the second half of 2008, and we do not expect any anti-trust concerns given the fragmented nature of the IT services industry.

With EDS currently trading at $24.34, slightly below the acquisition price, we upgrade the shares to Hold and set a $25.00 price target as we expect the transaction to close within the next six months. HP plans to establish a new business group, to be branded EDS, an HP company, which will be headquartered in EDS' existing executive office in Plano, Texas. The transaction is expected to be accretive to fiscal 2009 non-GAAP EPS and accretive to GAAP EPS in 2010.

We would be more positive on the stock if EDS is able to post a full year of increased signings. Without continuing momentum in contract signings, top-line growth will be difficult to sustain. Though the company has made significant strides in cost cutting by shifting its headcount to lower-cost geographies, gains on this front are likely to slow as the company reaches the limit of jobs that can be shifted to countries outside that of its customers.

Read the full analyst report on HPQ.

Read the full analyst report on EDS.