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13 May 2008
Moody's affirms Hewlett-Packard ratings. EDS under review for upgrade.
Approximately $10 billion of debt securities affected
New York, May 13, 2008 -- Moody's affirmed Hewlett-Packard's (HP) A2 long-term
and Prime-1 short-term ratings following the company's
announcement that it has entered into a definitive agreement to buy Electronic
Data Systems (EDS) for approximately $13 billion in cash.
Concurrently, Moody's placed the Baa3 long-term ratings
of EDS under review for upgrade. Both boards have approved the
transaction, which, subject to standard closing conditions,
is expected to close during the second half of calendar year 2008.
The review of EDS will focus on the legal structure post closing and whether
HP will guarantee the debt of EDS.
"The rating remains supported by HP's diversified, leading
and defensible market positions throughout a range of computing hardware
and information technology businesses," said Moody's
Senior Vice President, Richard Lane. "In addition,
HP shows solid and consistent earnings and operating cash flow,
all of which contribute to expectations of continued strong pro forma
debt protection measures and an excellent liquidity profile."
The proposed acquisition should provide HP with enhanced capabilities
and the scale that is increasingly important to efficiently deliver higher
value added solutions to a global customer base. While the integration
challenges will be meaningful in terms of sheer size (employees,
customers, partners, and physical locations), they are
mitigated by HP's past success at integrating other large acquisitions
and the company's track record of solid business execution.
The proposed acquisition will increase HP's financial leverage,
but the company has sufficient flexibility within the context of its existing
credit ratings to fund the transaction and maintain ongoing share repurchase
and dividend programs. Management's commitment to maintaining
a modestly leveraged balance sheet gives additional ratings support.
These goals include achieving an adjusted debt to adjusted EBITDA of approximately
1.0 times within 12 to 18 months following the closing of the proposed
Pro forma for the transaction, Moody's expects that adjusted
debt to EBITDA will be less than 1.4 times, free-cash-flow
to adjusted debt in excess of 40%, and EBIT to interest expense
more than 10 times all calculated using latest twelve month data and incorporating
Moody's standard analytic adjustments. Moody's expects
that the company will continue to maintain strong balance sheet liquidity
as well as alternate sources of liquidity (currently $6 billion
of committed bank facilities) in support of the Prime-1 short-term
Moody's affirmation of HP's ratings incorporates the company's
broad diversity by product, customer, end market, and
geography and its modest financial risk as embodied in its robust operating
cash flow, very strong liquidity and conservative financial leverage.
It also considers the company's consistent performance and an improved
balance of profitability across its business segments over the last three
years in terms of stable to improving profitability, returns,
While competition in its various business segments remains strong and
the macro economic environment will be challenging over the intermediate
term, Moody's expects HP's ongoing cost reduction efforts
and focus on profitable revenue growth will help it to maintain the solid
operating results and financial flexibility that are consistent with its
The acquisition of EDS should enhance HP's effective scale of operations
by allowing it to provide its global customer base with broader end-to-end
information technology solutions in a wider range of industry verticals.
Strong competition from established and fast emerging players in India
represent challenges that underscore the need to effectively and efficiently
streamline costs, enhance automation capabilities, and standardize
business processes in order to offer competitive, higher value added
services that can expand profit margins. While both HP and EDS
have made progress in these areas individually, the combined entity,
like other I/T companies, will have additional work to do to offer
a more integrated set of cost effective and value added I/T solutions.
Moody's raised the ratings of EDS to Baa3 in March 2008, reflecting
the company's improved business execution, financial performance,
and good market position in the I/T outsourcing sector. The stable
rating outlook at the time incorporated Moody's expectation that EDS would
be able to sustain its financial performance and that over the intermediate
term, contingent upon consistent execution, the company was
reasonably positioned to improve upon current performance levels.
For more details please refer to credit opinions for HP and EDS on www.moodys.com.
EDS's ratings placed on review for upgrade include:
$700 million 7.125% Senior Unsecured Notes due 2009
$690 million 3.875% Convertible Senior Unsecured
Notes due 2023 - Baa3;
$1.1 billion 6% Senior Unsecured Notes due 2013 -
$962 million Senior Unsecured Convertible Notes due 2021 -
$300 million Senior Unsecured Notes due 2029 - Baa3.
Headquartered in Plano Texas, EDS, with $22.1
billion in revenue and $1.5 billion in EBIT for the year
ended December 2007, provides a range of information technology
(I/T) outsourcing and project services. The company has approximately
140,000 employees, about 27,000 of which are located
in India and another 14,000 are located in other low-cost,
With $108 billion in revenue and $1.5 billion in
EBIT for the latest twelve months ended January 2008, Hewlett-Packard,
based in Palo Alto, California, is the world's largest technology
firm that designs, manufactures, and services computing and
imaging systems and provides information technology and consulting services.
Richard J. Lane
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Alexandra S. Parker
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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