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The Wall Street Journal reports that Hewlett Packard (NASDAQ: HPQ) will spend $12.8 billion to buy Electronic Data Systems (NYSE: EDS). While this combination would make HP the second largest, behind International Business Machines (NYSE: IBM) in computer services, this may not be a good way to spend $12.8 billion.
That's because EDS and HP would under perform in services when it comes to profitability. EDS's bigger business earned a 1% net profit margin in the first quarter. But HP's services business generated a far higher 9% estimated net margin. Unfortunately -- for reasons described below -- the combined company will probably have lower margins.
Meanwhile, IBM's profit lagged HP's slightly -- it made an estimated 7% net margin in the first quarter in its services business. But IBM is and will remain a much bigger player. Combined, EDS and HP's services business will control 5.3% -- lagging IBM. That's because IBM controlled 7.2% of the tech-services market in 2007 while EDS was a distant second at 3% and HP was fifth, with a 2.3% share.
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