HP is rumored to be planning to acquire Electronic Data Systems (News - Alert) (EDS). The deal is estimated to be worth about $12 billion to $13 billion and an announcement is expected by the end of the day on Tuesday.

 

Although HP declined to comment, through a press release it was confirmed that the company has "engaged in advanced discussions" with EDS about "a possible business combination involving the two companies.” However, it clarified that that this did not mean a deal would be finalized soon. It also said that HP would not comment further until either a deal is reached or discussions are ended.

 

The deal is expected to strengthen HP’s services sector and make it a powerhouse in the computer service industry, which is currently dominated by IBM (News - Alert). This should also help HP acquire more data management and consulting contracts.

 

This acquisition would also impact Sun Microsystems (News - Alert) and Dell Computer as they depend on EDS for customer service.

 

EDS’ acquisition would also be HP’s biggest since it obtained Compaq in 2002 for $19 billion.

 

The EDS deal is also expected to boost HP’s profits as the company’s services sector is relatively stable and offers much higher margins compared to the commodity PCs and printers which dominate HP's revenue. HP has been scouting for possible acquisitions to boost its service revenue for a long time. In 2000, it attempted a take over of the consulting business of PricewaterhouseCoopers (News - Alert), but eventually settled for an alliance to sell supply chain software and create an Aviation Solution Center.

 

EDS shares zoomed nearly 28 percent higher to $24.13 on the New York Stock Exchange on news of this impending deal, while HP shares ended down by nearly five percent to $46.74.

 

EDS has been facing stiff competition from IBM, Accenture and Computer Sciences Corporation, as well as from Indian rivals Infosys (News - Alert) Technologies, Tata Consultancy Services, and Cognizant Technology Solutions. The company has experienced a tough past three years, with EDS' shares falling by more than 32 percent in the last year alone. This deal, if it becomes a reality, should give EDS a much needed boost.