Computer giant Hewlett-Packard is "engaged in advanced discussions" with consulting firm Electronic Data Systems about a "possible business combination involving the two companies," HP said yesterday.

If HP were to buy EDS, it would strengthen its own business consulting arm, which helps companies design, build and manage complicated computer systems. That would make HP a more formidable rival to IBM, which has a large and famous consulting division.

HP said there were "no assurances" that a deal would be reached. That didn't stop EDS shares from jumping 28 percent on the news to close at $24.13. That made EDS' market capitalization about $12 billion.

The Wall Street Journal, citing unnamed sources, said yesterday that HP might pay $12 billion to $13 billion for EDS.

HP shares fell 5 percent to close at $46.83 on the news.

"We think the deal makes sense," Standard & Poor's equity analyst Dylan Cathers said in a research note. EDS has been struggling to compete with IBM and low-cost outsourcing firms based in India, he said.

Forrester Research analyst Christine Ferrusi Ross says that combining EDS and HP's consulting division would improve economies of scale, saving costs. HP earned about $4.4 billion in consulting revenue in the most recent quarter, while EDS took in $5.8 billion in revenue. Together, that's a bit larger than IBM's consulting division, which earned $9.7 billion in its most recent quarter.

But she says there are limits to what EDS could bring HP. A merger "expands the size of the deals (HP) can go after — but not the type," she says. HP and EDS offer very similar consulting services, neither as well-suited for complicated, global projects as IBM is, she says.

Integration could be a challenge. HP is a Silicon Valley stalwart. EDS, based in Plano, Texas, was founded by outspoken former presidential candidate Ross Perot in 1962.

The two companies "have wildly different corporate cultures," Ferrusi Ross says.

HP's relationship with its consulting arm has been "very inconsistent," she says, but it's not the first time the company has considered a big expansion. In 2000, HP was in negotiations to buy PricewaterhouseCoopers' consulting division, but the deal fell apart.

An EDS acquisition could be HP's biggest since its 2002 purchase of Compaq Computer.