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Disruptive Role

By Reuters  |  Posted 09-16-2008 Print

Hewlett Packard plan to lay off 7.5 percent of its workforce to realize savings from its buy of services competitor EDS.

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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