September 16, 2008
Big Hewlett-Packard Cuts Surprise Wall Street
By JORDAN ROBERTSON
SAN FRANCISCO - When Hewlett-Packard Co. announced five months ago it was acquiring technology-services firm Electronic Data Systems Corp., Wall Street expected big layoffs from the combined company. But the size of the job cuts 24,600 jobs over the next three years, nearly 8 percent of HPs 320,000-employee work force came as a shock when HP laid out its plans Monday for integrating EDS. It is not known what impact if any Hewlett-Packards job cuts might have on the EDS office in the South Charleston Technical Park. The office has a information technology contract with the U.S. Department of Housing and Urban Development. HPs surprise announcementcould provide a lift for the Palo Alto-based companys stock price today because of the potential cost savings from the dramatic reduction in staff and HP Chief Executive Mark Hurds track record for wringing more profits out of lean operations. Todays story is kind of an eyebrow-raiser I was surprised at the magnitude of the cuts, said analyst Bob Djurdjevic with Annex Research. Djurdjevic added that EDS had been cutting jobs before HP bought it, and some investors were concerned those cutbacks werent addressing a key problem for EDS in the need to ink more profitable deals. That challenge now falls to HP. The cuts represent HPs most aggressive cost-cutting move yet under Hurd, who engineered the $13.9 billion acquisition to challenge IBM Corp. for more of the lucrative, long- term business of helping companies manage their computing infrastructure. Most of the cuts will come from within EDSs ranks, and nearly half will be jobs in the U.S., HP announced Monday after the stock market closed. HP said it plans to eventually add about half the positions back as different jobs in different departments within the company. Some of the areas expected to get hit include the finance, human resources and legal departments, areas where there are traditionally overlapping duties within combined companies. HP had not previously detailed how many employees of the combined company would lose their jobs. Before the acquisition, HP had 178,000 people and EDS had 142,000. HP expects to save $1.8 billion per year from the cuts once the restructuring is complete. The company will incur a $1.7 billion charge in the current three- month period, its fiscal fourth quarter, for a goodwill adjustment and other costs connected to the restructuring. At a conference with financial analysts Monday, HP Chief Financial Officer Cathie Lesjak said the EDS deal is expected to add to HPs net profit in the 2010 fiscal year. Until then, HP is planning for the acquisition to reduce net income by 17 cents to 19 cents a share in the current quarter, which ends Oct. 31, and 6 cents to 11 cents per share in the 2009 fiscal year, Lesjak said at the conference in San Francisco. As huge as the reductions are, theyre not the biggest in tech history. In the early 1990s, Armonk, N.Y.-based IBM shed more than 150,000 workers over a five-year stretch as it racked up nearly $16 billion in losses and faced questions about its survival. With the addition of EDS, HP hopes to challenge IBMs core services business in a bigger way. HP and EDS had a combined $38.8 billion in services revenue last year. The combined sales eclipsed HPs revenues from its personal-computer division, HPs biggest business unit for that period. HP is the worlds No. 1 seller of PCs worldwide. IBM had $51.4 billion in total technology and business-services revenue in 2007. Competition for services contracts is intensifying as businesses look for ways to offload some of their information- technology chores. Rising energy prices and demand for more computing power has made deploying new technology more costly and complicated, a combination that makes outsourcing those duties increasingly attractive for companies looking to cut costs. The turmoil on Wall Street has actually increased demand for those services in some sectors because its often viewed as an investment that can help companies save money over the long term. One of the biggest challenges facing Hurd has been finding new ways to improve sales at a company that last year cracked $100 billion in revenue for the first time while keeping Wall Street happy with improving profit margins. Hurd has been aggressive about cutting costs since he was hired in 2005. His first big act was a major restructuring that eliminated nearly 15,000 jobs. Hurds changes have helped HP wring more profits from its businesses even as the personal- computer industry as a whole grapples with shrinking profit margins, and HPs crown-jewel business printer ink faces intensifying competition from lower-cost competitors.
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