Hewlett-Packard this afternoon confirmed it has had advanced talks with EDS, the Texas-based IT services company, about "a possible business combination." Shares in EDS soared 28 per cent boosting its market value to $12 billion according to Reuters. HP shares fell 5 per cent.

EDS's performance has been lackluster reports Reuters:

"Unless HP has some synergies where they can dramatically impact earnings growth of EDS, I'm not sure why they'd want to buy it," said Jim Huguet, co-chief executive at Great Companies LLC. He noted that EDS's earnings growth has averaged 2.8 percent.

"EDS is trading at about half its historical PE, so they're obviously seeing it as a value, which it is if you can generate earns growth at 15-20 percent. But my question is whether it will become a drain on Hewlett-Packard?"

In April, EDS reported a 62 percent decline in first quarter profit, though the results had topped Wall Street expectations. Despite the beat, analysts said EDS faced intense competition from Indian rivals and saw little catalyst for growth.

Foremski's Take:

• - HP CEO Mark Hurd is seeking to capitalize on HP's renewed momentum and take on rival IBM by beefing up IT services.
• - EDS has a solid IT services business with a lot of government contracts that could help balance out a possible recession in other industry sectors.
• - There might seem to be a large cultural difference between the two companies but Compaq, which HP acquired in 2002, was headquartered in Texas.
• - HP would still need to gain a high-end IT consultancy business in order to compete with IBM.
• - Another area that HP still needs to address is in its middleware software business.
• - The timing is quite good. It is best to try and complete such a large acquisition and integration during times of economic slowdown so that the combined entity is firing on all cylinders when boom times come around again.

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