PALO ALTO, Ca. – Hewlett-Packard announced Tuesday it is buying EDS – the former IT arm of General Motors Corp. – for $13.9 billion, a price that struck analysts as surprisingly high. The deal will create a computer services giant intended to rival IBM in the market for serving business customers.

The deal is expected to close in the second half of 2008 and to be accretive to 2010 GAAP earnings. HP expects the acquisition to double sales in its services business, which had $16.6 billion in sales in fiscal 2007. Together, the two companies’ services businesses had 2007 sales of more than $38 billion and 210,000 employees with operations in more than 80 countries.

HP said it will establish a new business group, called EDS–an HP company, which will be headquartered at EDS’s existing executive offices in Plano, Texas.

EDS will continue to be led by EDS Chairman, President and Chief Executive Officer Ronald Rittenmeyer, who will join HP’s executive council and report to Mark Hurd, HP’s chairman and chief executive officer, the company said. All of HP’s existing technology services will remain under its TSG (Technology Services Group) wing reporting to its current director Ann Livermore, with the exception of outsourcing, which will now fall under Rittenmeyer’s purview at EDS.

In a conference call with reporters Tuesday, Hurd said the EDS acquisition will exend H-P’s reach into sectors like government and the manufacturing industry, and give it more capability to outsource companies’ computer systems. He also said EDS’s services operations are “leaner” than H-P’s. Still, Rittenmeyer said he expects EDS to continue its in-progress layoffs after the deal closes.

The two executives also said there’s relatively little overlap between the H-P and EDS customer bases. Hurd said that under H-P, EDS will continue to use and service hardware made by companies other than H-P, and that doing so is a necessity to building new business.

EDS competes with one arm of IBM existing lines of business. With HP’s clout behind it, EDS poses a greater threat to IBM in the computer services segment. Although IBM is widely known as a hardware maker, it has derived the bulk of its sales and profit from software and services for years.

The EDS move is a risky one for Hurd, whose company is already the world’s largest maker of personal computers with a market capitalization of $115 billion. Now it would have to digest a large company with a starkly different culture than its own. The combined company would be able to trim overhead costs �?? and perhaps allow H-P to sell more computers to EDS’s consulting clients.

That’s largely been the model for IBM, which accounted for 7.2 percent of the tech-services market last year, according to research firm Gartner Inc. EDS was a distant second at 3 percent, while H-P was fifth, with a 2.3 percent share.

The information-technology services market is attractive because it is expected to grow at more than 8 percent a year for the next five years, and can insulate companies from business cycles in computer hardware and software. Wall Street estimates that overall H-P revenue will grow about 5 percent in its fiscal year ending October 2009.

H-P has been trying to bolster its services offerings for years, since a failed 2000 bid by then-Chief Executive Carly Fiorina to acquire the PricewaterhouseCoopers consulting operation in a deal valued at between $17 billion and $18 billion. IBM ended up buying the PwC unit two years later for just $3.5 billion.

Since then, H-P has taken smaller steps to improve its services by buying smaller companies; the largest was software services provider Mercury Interactive Corp., which H-P bought for $4.5 billion in 2006.

Even after that deal, H-P has remained in fifth-place in worldwide services revenue. In fiscal 2007, H-P’s services unit accounted for about $16 of every $100 of company sales. Had EDS been part of the company, that figure would have climbed to about $30 for every $100.

While the deal gives H-P’s services unit a similar scale to IBM’s, a combined EDS-H-P would still be less profitable than IBM or Accenture Inc., said Lou Miscoscia, an analyst with Cowen & Co, on Monday. “I don’t think anyone who had H-P shares was expecting or wanting this to happen,” he said, since EDS has grown slowly in recent years, and has an operating margin of just 6%, half of IBM’s.

But with companies increasingly farming out their IT departments as well as more complex business functions, such as accounting and supply-chain management, Mr. Hurd decided to quickly reach a scale approaching IBM’s.

Success isn’t guaranteed. Companies have been increasingly offshoring service contracts to companies based in India. As a result, EDS has had trouble growing as an independent company, with its stock rising just 7 percent in the last five years.

That’s an improvement over where EDS was in 2002 and 2003, when it lost $1 billion each year. The company recovered after its board appointed a new CEO, Michael Jordan, who had led a revival at Westinghouse Electric, which became CBS.

Forbes, CNET News.Com and The Wall Street Journal contributed to this article.

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