Fitch Affirms Hewlett Packard on Proposed EDS Acquisition; Outlook Stable

Fitch Ratings has today affirmed Hewlett-Packard Company’s (HP) ratings following today’s proposed acquisition by HP of Electronic Data Systems Corporation (EDS; rated ‘BBB’ and on Rating Watch Positive by Fitch), a leading global technology services company, in an all-cash transaction valued at US$25 per share, or approximately US$13.9 billion on an enterprise value basis. Fitch expects the vast majority of the purchase price to be debt-financed. The terms of the transaction have been approved by HP’s and EDS’ boards of directors. The acquisition is expected to close in second-half 2008 (2H’08), subject to regulatory approvals.

Fitch has affirmed HP’s ratings with a Stable Outlook as follows:

–Long-term IDR at ‘A+’;

–Senior unsecured debt at ‘A+’;

–Senior credit facility at ‘A+’;

–Commercial Paper (CP) at ‘F1′.

In addition, Fitch has affirmed Hewlett-Packard International Bank PLC’s CP rating at ‘F1′.

Approximately US$15.8 billion of debt is affected by Fitch’s actions, including the company’s US$6 billion of undrawn credit facilities.

Fitch believes HP’s proposed acquisition of EDS will significantly expand the scale, geographic diversity and breadth of service line offerings, especially for higher growth application services, of HP’s existing information technology (IT) services business. In addition, HP has the opportunity to significantly reduce the overhead cost structure of EDS. For the latest 12 months (LTM) ended March 31, 2008, EDS generated total revenue, operating EBITDA and free cash flow of US$22.3 billion, US$2.6 billion (11.9% margin) and US$750 million, respectively. Fitch remains concerned about the deflationary pricing pressures in the IT services industry due to the highly competitive environment and increasing number and type of outsourcing engagements performed offshore at a fraction of the onshore cost, along with significant market share gains made by India-based services vendors in applications at the expense of EDS and other multinational IT services companies. Applications remain EDS’s second-largest service line offering, accounting for approximately 30% of total revenue.

The ratings and Stable Outlook for HP are supported by Fitch’s expectations that HP’s credit protection measures will initially weaken upon closing of the acquisition, but will gradually improve in 12-to-18 months due to debt reduction and profitability improvements primarily from considerable cost reductions. Fitch expects leverage (Total Debt/Operating EBITDA) will be below 1.75x, compared to approximately 0.6x currently, and interest coverage will decline to approximately 12x from 25x. Fitch also expects HP will maintain a share repurchase program and moderate acquisition activity while ultimately reducing leverage (via debt reduction and profitability improvement).

The ratings also reflect HP’s strong financial flexibility and liquidity provided by a significant cash position (majority overseas) and robust free cash flow, as well as significant and increasing recurring revenue via outsourcing services, printer supplies, technology services, and software maintenance. Fitch estimates the acquisition of EDS will increase the aggregate amount of recurring revenue to approximately 40% of total revenue from 33%.

Fitch further believes that HP’s solid revenue growth and continued margin expansion across all business segments provides diversity, balance and stability to the company’s financial profile. The ratings also take into account HP’s broad product portfolio with strong market share positions in printing, personal computers (PC), enterprise systems, and, with the proposed acquisition of EDS, IT services. HP’s multi-channel distribution model also enables the company to benefit from solid worldwide consumer PC demand, especially for notebooks. Moreover, HP’s geographically diversified revenue base supports the ratings, as over 60% of revenue is derived from outside the US.

However, the potential continuation of HP’s aggressive share repurchase program or pursuit of additional material acquisitions contrary to Fitch’s expectations may result in lower-than-expected debt reduction. Furthermore, Fitch is concerned about challenges in integrating EDS, which may ultimately lead to declining customer satisfaction, customer renewal rates and/or new contract signings. However, Fitch views integration risk as manageable given the limited business overlap. Also, permanent changes in financial policies that result in greater dependency on financial leverage to achieve business objectives and/or maximize returns to shareholders, could result in negative rating actions. Lastly, the necessity for continual new product introductions due to relatively short product lifecycles may cause some rating pressure for HP.

Pro-forma for the acquisition, HP’s financial flexibility and liquidity are expected to remain solid due to a strong balance sheet with cash and equivalents in excess of US$10 billion (primarily located offshore). HP’s liquidity is further supported by strong and increasing free cash flow (post-dividends), which was in excess of USD9 billion on a combined company basis based on the latest twelve months results for each company. HP also has a USD3 billion, five-year credit facility expiring May 2012, a USD3 billion, 364-day credit facility expiring February 2009, and multiple revolving trade receivables facilities with aggregate maximum capacity and availability of US$647 million and US$114 million, respectively, as of Jan. 31, 2008.

Fitch estimates total pro-forma debt will increase substantially to more than USD20bn, of which approximately one-third will be attributable to HP’s customer-financing business with the remaining debt attributable to the core operations (non-financing). HP’s next significant long-term debt maturities consist of USD1bn and US$750 million of global notes maturing in June and September 2009, respectively. Furthermore, HP currently has approximately US$1.5 billion of short-term debt outstanding, primarily CP.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria, and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance, and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.