NEW YORK, May 13, 2008 (BUSINESS WIRE) -- 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.

SOURCE: Fitch Ratings

Fitch Ratings
John M. Witt, CFA, +1-212-908-0673
Nick P. Nilarp, CFA, +1-212-908-0649 (New York)
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)

Copyright Business Wire 2008