Headline-grabbing news last week regarding the Hewlett-Packard buyout of Electronic Data Systems prompted us to check in with Zacks senior technology analyst
Steve Biggs, CFA, who covers both companies. We also found out which tech stocks he rates the strongest for the near term.
Does Hewlett-Packard's buying out of EDS have any immediate impact on the tech sector overall, or does it mostly just make HP a bigger competitor versus IBM?
With the addition of EDS (EDS), HP will have triple the size of its services business and become a much closer competitor to IBM (IBM). We had a Sell rating on EDS prior to the announcement of HP's acquisition due to declining contract signings, which don't bode well for future results.
In fact, I have been somewhat negative on most of the IT services industry. I believe
large scale outsourcing, such as what EDS and IBM do, is on the decline with enterprises choosing to bring more IT infrastructure management back in-house and outsource to smaller specialty providers that focus on certain aspects of the business, such as account statements, human resources, etc.
Given my view on EDS, I believe this could be a major disruption for Hewlett-Packard (HPQ) as they are battling a deteriorating top-line. HP believes that they can take out $1 billion in expenses, so profitability may be able to meet expectations, although this will take time. CEO Mark Hurd is known for organizational skills and his ability to cut costs, which helped HP realize benefits from the Compaq acquisition.
EDS is also a partner of Opsware, which HP acquired last year, and had tried to buy the company in the past. My belief is that over the next year or so, investors will look at likely revenue disappointments which will likely hurt the shares. Five years down the road, we might be able to look at this acquisition and see how it helped HP's competitive position, much like the Compaq acquisition.
How has The Street reacted to the news in the couple days since this announcement?
As expected, EDS was up based on the cash value of HP's offer and HP was down due to concerns over risks associated with the acquisition. The increased merger and acquisition activity we have seen over the past few quarters is probably a good sign for technology stocks in general, as acquirers perceive value in these companies. A number of companies in my universe have been acquired or have agreed to acquisitions over the past months.
