Hewlett Packard sets its sights on IBM

This is the biggest IT services deal ever, said Gartner analyst Ben Pring. Computer-and-printer giant Hewlett Packard is buying EDS, which manages other firms' computer systems and tasks such as order processing, for $14bn.

The deal would form the second-largest group in the lucrative but highly competitive IT services market and help HP mount an assault on IBM's leadership in the sector. But HP's shares fell by around 10% on the news.

Will the deal work?

HP boss Mark Hurd didn't emphasise the "significant" cost savings, so investors concentrated on the fact that EDS is a relatively low-margin and low growth business, said Lex in the FT. But therein lies opportunity. HP is aiming to bulk up its small services business, especially in EDS's top area of large IT outsourcing contracts, and HP has both the required capital and scope to take short-term losses in return for longer-term profits.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Hurd managed to give rival PC maker Compaq's margins a significant boost when he inherited it after taking over from his ousted predecessor, said Rob Cox on Breakingviews.

Another potential difficulty is the likely culture clash. Poor integration management hit HP when Compaq was taken over, as Robert Cyran said on Breakingviews. "Whether HP can repeat the good parts of the Compaq acquisition" the improved profitability in Hurd's tenure "without the bad remains to be seen."

HP: 12m change 2%

EDS: 12m change 14%

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.