Hewlett-Packard (HPQ) confirmed it’s buying EDS (EDS) for $25 a share, or $12.5 billion. HP said the deal will more than double its services revenue and add to earnings by 2010. HP said it intends to establish a new business group, to be branded EDS – an HP company, which will be headquartered at EDS’s existing executive offices in Plano, Texas. 

“The combination of HP and EDS will create a leading force in global IT services,” said CEO Mark Hurd. “Together, we will be a stronger business partner, delivering customers the broadest, most competitive portfolio of products and services in the industry. This reinforces our commitment to help customers manage and transform their technology to achieve better results.”

HP doesn’t seem to be making the deal out of weakness: The company said Tuesday it expects to make 87 cents a share for the second quarter on revenue of $28.3 billion. Both of those figures are above the Wall Street analyst consensus estimate. HP also boosted its full-year forecasts. And Hurd will no doubt explain how deal will help HP take on the biggest U.S. computer services company, IBM (IBM), in conference calls set to begin at 8 this morning.

But skeptics point to EDS’ slow growth and wonder why Hurd would jeopardize the turnaround he has so painstakingly guided with a big deal. Judging by the reaction in HP shares - the stock sold off yesterday on reports of the deal, and dropped an additional 2% in premarket trading Tuesday - a lot of investors are yet to be persuaded this is the right deal for HP.

Hewlett-Packard (HPQ) chief Mark Hurd has some explaining to do. HP shares dropped 5% after The Wall Street Journal reported the company is about to announce a purchase of computer services outsourcer EDS (EDS). Investors in EDS love the reported deal, in part because the company has been trying to sell itself on and off for years. But for Hewlett investors, the transaction could be more troubling, says Stephen McClellan, a former computer services analyst at Merrill Lynch and Salomon Brothers.

“EDS is viewed as a no-growth, struggling company in an area that has matured,” says McClellan. While he says Hurd has earned high marks for his work in making HP a sharper, better-focused organization over the past three years, the decision to make a splashy acquisition that offers few apparent opportunities for economies of scale “certainly raises a few questions” about the sustainability of Hurd’s turnaround at HP, McClellan says.

“Hurd is a low-key, quality guy,” McClellan says. “He’s a terrific inside leader.” McClellan adds that Hurd’s gains at HP - the stock has more than doubled since he took over for Carly Fiorina back in 2005 - are all the more impressive because he has generally eschewed big acquisitions in favor of good old-fashioned organic growth. But the decision to depart from that strategy with an EDS deal is “confusing.”

McClellan says he believes Hurd deserves “the benefit of the doubt” because of his excellent work at HP so far. But he outlines what he sees as the worst-case scenario about big acquisitions in his recent book, Full of Bull, which aspires to tell investors how they can filter out the noise in Wall Street research to make better investing decisions. In the book, McClellan calls Fiorina’s purchase of Compaq “a distress tactic” whose failure was foreordained - and suggested conditions at HP were more dire than investors knew. HP investors are certainly hoping they aren’t about to see that movie again.

EDS (EDS) shares spiked after The Wall Street Journal reported Hewlett-Packard (HPQ) is near a deal to acquire the computer services company for $12 billion to $13 billion. A deal, which the Journal reports could be announced as soon as Tuesday, would value EDS shares in the mid-$20s, up from $18.86 at the close Friday. Update: HP confirms it is talking with EDS about a “possible business combination.”

The acquisition would be HP’s biggest since CEO Mark Hurd took over in 2005, eclipsing the company’s 2006 purchase of software company Mercury Interactive. HP shares have more than doubled since Hurd arrived - but as Fortune’s Adam Lashinsky recently pointed out, Hurd is never satisfied with what others might deem success. “You should think of HP as a company of transformation with a bunch of mini-transformations within that,” Hurd said back in February. While HP shares dropped 3% on word of the possible deal, EDS shares jumped 25%, hitting $23.70 in afternoon trading.

This just in from Fortune’s Scott Moritz:

The latest earnings report from Dell (DELL) suggests founder Michael Dell hasn’t restored the magic to the PC giant. The Round Rock, Texas, computer maker missed fourth-quarter earnings estimates by a penny after the market closed Thursday, on slightly weaker-than expected sales. The less-than-fantastic performance underscores Dell’s struggle against top PC shop Hewlett-Packard (HPQ).

Dell has been attempting to shift its business model from a light inventory online sales stream to a more conventional retail outlet approach. But the problem is, says one investor who is short Dell’s stock, is that “they are taking on the king of the sales channel, and their costs and capabilities are out of whack.”

Adjusting for one-time items, Dell posted earnings of 35 cents a share, up from 30 cents a year ago but not quite enough to meet the analysts’ estimates of 36 cents. Sales in the fourth quarter were $15.9 billion, up from $15.6 billion in the third quarter and above the $14.4 billion level last year. Analysts were looking for $16 billion.

Analysts point to Dell’s modest product growth rates as a sign that the company isn’t swiping much market share from the competition. PC sales grew 11% in the quarter and notebook sales were up 13%. While that’s respectable, there is still a wide disparity between those numbers and H-P’s 50% notebook growth rate.

Gross margins, the take of revenue left after covering the cost of sales, actually widened to 18.8% from 18.5% in the third quarter, due largely to the cheaper costs of supplies like memory and chips. That break on expenses was expected to provide Dell with a little tailwind as it sailed through the quarter. But so far Michael Dell’s strategy to push into big retail stores like Wal-Mart (WMT), Staples (SPLS) and Best Buy (BBY) hasn’t fired up as much revenue growth as Wall Street had hoped.

Dell shares fell 80 cents, or 4%, to $20.07 in after-hours trading.