Why I like an HP EDS deal
Hewlett-Packard is taking another large step to expand its horizons. The new deal with EDS will represent its biggest purchases since it bought Compaq in 2002. In buying EDS, HP hopes that it can expand its marketshare in the computer servicing sector. My thoughts, it adds plenty of shareholder value even if HP does take on some debt to finance the acquisition.
Traders have been unusually harsh on HP after it released news that it would be buying EDS. Though the company has very little exposure to the servicing industry (just 3% compared to IBMs 10%) HP will quickly advance to having a 7% share. The service industry market is as big as $780 billion per year in sales and is growing at a rate of 10% per year. EDS’s profits on the other hand have advanced at a rate of about 17% per year, suggesting that its own earnings are outpacing the growth in the sector, something that should be well received in the light of an acquisition.
The current CEO of HP, Mark Hurd has done much to turnaround the once slumping computer and printer manufacturer. He’s done very well in cost cutting, enough so that HP has the ability to finance this newest merger and even so much that its invested nearly $800 Billion in the computer software industry since his start as CEO. Though software continues to prove profitable, computer servicing provides more consistent profits which will help bolster HP’s bottomline.
I’m perfectly expecting that Mark Hurd will be able to work the same magic with EDS, cutting unnecessary costs and growing its market against the giant of IBM. While this does greatly increase his responsibilities, it offers plenty of future rewards, EDS makes a pure profit of $600 Million per year on a market cap of $13 Billion, not too shabby with growth rates of 17%. HP made a great acquisiton at this price and can do much to undermine its competition.
At this price of $45 per share, go with HPQ for the long term. This acquisition will really boost the bottomline and exposure to better computer markets.