Hewlett-Packard will buy EDS for $13.9B

— -- The deal is a "reverse merger" that keeps EDS largely intact, says HP Chief Strategy Officer Shane Robison. HP's consulting unit, which has about 70,000 employees, will be rolled into EDS, which has about 140,000 employees. The combined entity will be known as "EDS — an HP company."

EDS CEO Ronald Rittenmeyer will run the new division. It will be based at EDS's Plano, Texas, headquarters, about 1,700 miles from HP's main office in Palo Alto, Calif.

Layoffs are expected. "We're looking to streamline our overhead," Robison says.

The combined company will have about $38 billion in revenue and 5% of the fractured consulting services market, says researcher Gartner. IBM's legendary consulting division has about 7% of the market. "IBM is a formidable competitor, but the industry desperately wants a credible No. 2," Robison says.

HP will pay $25 for each EDS share, stock option, and restricted stock unit. HP will also assume about $3.3 billion in debt, while obtaining some cash and minority interests. These amounts are included in the $13.9 billion purchase price. The deal is expected to close in the second half of the year.

The news sent EDS shares up another 1% Tuesday. They jumped 28% Monday after HP made news of the negotiations public.

HP shares fell 4.7% Tuesday.

"It certainly makes sense," says Gartner tech analyst Allie Young. HP reaches thousands of business customers with its hardware and software products. EDS has greater expertise in offering business services. Together, "they could sell more services deals," she says.

Economies of scale could also help cut costs. That's a concern for EDS, which has had accounting and profitability problems in the past. One of the biggest issues: a multi-billion contract with the U.S. military that became a big money-loser.