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Rating Action:

Moody's affirms Hewlett-Packard ratings. EDS under review for upgrade.

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 acquisition.

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 rating.

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, and execution.

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 rating.

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 - Baa3;

$690 million 3.875% Convertible Senior Unsecured Notes due 2023 - Baa3;

$1.1 billion 6% Senior Unsecured Notes due 2013 - Baa3;

$962 million Senior Unsecured Convertible Notes due 2021 - Baa3;

$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, offshore geographies.

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.

New York
Richard J. Lane
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Alexandra S. Parker
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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