Integrating EDS, HP to Cut Nearly 25,000 U.S. Jobs

By Reuters  |  Posted 09-16-2008

Integrating EDS, HP to Cut Nearly 25,000 U.S. Jobs

Hewlett-Packard plans to cut 7.5 percent of its work force, or 24,600 jobs, seeking to realize savings from its recent acquisition of Electronic Data Systems, the company said on Monday.

HP said it would carry out the cutbacks over the next three years, while replacing about half the jobs in new areas of its services business. It announced the plan ahead of a meeting with Wall Street analysts to detail the merger plans.

Nearly half of the job reductions will take place in the United States, the Palo Alto, California-based company said.

EDS was headquartered in Plano, Texas, near Dallas.

"We are good at integrating companies ... I believe we will do it well," HP Chairman and Chief Executive Mark Hurd told financial analysts at the company's headquarters.

Hurd was referring to the company's 2002 mega-merger of HP and Compaq Computer and a succession of software deals HP has made in recent years to bolster its business helping automate how companies manage their networks and systems.

The $13.2 billion acquisition of EDS, a deal announced in May and closed in August, made HP the world's second largest provider of technology services, up from No. 5 previously.

Rival IBM is No. 1 in computer services, and HP's strategy takes aim at this dominance.

The deal bolsters HP's business in the United States and Britain, two strong markets for EDS, both among commercial clients and in government agencies.

EDS also gives HP the No. 1 position in "applications management"--providing maintenance and outsourced management of older software systems. EDS was founded in 1962 by ex-IBM salesman H. Ross Perot, who helped pioneer the market for outsourced computer operations and other technical services.

HP said it would take a charge of $1.7 billion in the fiscal fourth quarter ending in October. Accounting for goodwill will cost $1.4 billion, while cost of the restructuring will involve anther $300 million.

HP estimated $1.8 billion in annual cost savings once the three-year cost-cutting program is completed.

Disruptive Role

Disruptive Role

HP's shares fell 3.5 percent to close at $45.33 ahead of the analysts' meeting on Monday afternoon, amid a broad sell-off.

Following the news, HP shares regained 55 cents, or 1.2 percent, to trade at $45.88 in after-hours trading.

Chief Financial Officer Cathie Lesjak told analysts that the integration of EDS into HP will cut into HP's net profits in its current fourth quarter ending in October and the 2009 fiscal year before turning positive during 2010.

She said the merger of EDS and HP services business will result in a blended operating margin of 9 percent to 10 percent in fiscal 2009 and that margin will grow to 11 percent to 13 percent in fiscal 2010. In the long-term, HP expects operating margins to grow to historic HP norms around 13-15 percent.

Ann Livermore, executive vice president of HP's Technology Solutions Group, told the meeting the merger with EDS would help the company compete more aggressively for big business customers in a market that will be worth $451 billion by 2010.

She said the combination of HP and EDS position the combined company to play a disruptive role in the computer and technical services market, long dominated by IBM.

HP is well positioned to help companies cut the costs of managing their technical systems through services such as virtualization--merging multiple computer or storage systems into a small number of machines--and server automation.

The company can also attack the fast-growing centralized data center market with its market-leading position in blade servers and heavy investments in recent years in network management software, she said.

"This is a market looking to be disrupted," Livermore said. "We have got ourselves positioned to be where the market is moving ... The core trends are very much playing to HP's strengths.".

At the time the merger was announced in May, HP counted 178,000 employees on its books and EDS had 142,000 employees.

Including the value of common stock, options and restricted stock units, the enterprise value of the deal totals $13.9 billion. The deal closed last month.

Hewlett-Packard said the vast majority of the cuts would focus on eliminating overlapping jobs at EDS in corporate functions such as legal, accounting, information technology and human resources, as well as excess office space.

Lesjak said the EDS impact on HP's results for the upcoming fiscal year ending in October 2009 will be to reduce net profit by 6 cents to 11 cents a share. The impact of the deal will turn positive in fiscal 2010 by 11 cents to 16 cents a share.

Ignoring one-time charges, the deal will add 18 cents to 22 cents per share to fiscal 2009 and 38 cents to 42 cents over the course of fiscal 2010, she said.

Lesjak said that for the fourth quarter the merger would cost them one cent to breakeven, excluding restructuring and write-down charges.

The CFO reiterated the company's previous forecast for investors to expect a fourth-quarter net profit of 95 cents to 97 cents per share on revenue around $30.2-$30.3 billion.

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