EDS Integration Means HP Must Cut 24,000 Jobs

The cuts will be in overlapping areas and spread out over three years, with about half of the total cuts coming in fiscal 2009.

September 15, 2008
By

Andy Patrizio

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Hewlett-Packard today announced plans to begin the process of integrating EDS as its fourth business group, but the integration is not going to be painless. The company announced 24,600 people, 7.5 percent of the total 320,000-person workforce of the two combined firms, are headed for unemployment.

If there's a silver lining for those who will lose their jobs, it's that not all the cuts are immediate. HP plans to let the employees go over the course of three years, with about half of them coming in fiscal 2009, according to Cathy Lesjak, HP's executive vice president and chief financial officer. HP announced its plans to purchase EDS for $13.9 billion in May.

As part of her presentation to financial analysts that was Webcast, Lesjak said that "Capital plans are not changing" at HP. It will continue to do share buybacks and small acquisitions but nothing on the scale of the $11 billion share buyback done last year or acquisitions as big as EDS.

Lesjak said she expected HP to take a $1.7 billion charge in the fourth quarter related to the acquisition, with $1.4 billion of that coming from a write down of goodwill and the rest being a charge in general account charges.

"We expect to emerge from this transformation with a competitive cost structure," she said, adding that HP (NYSE: HPQ) is still confident of its quarterly guidance given last month.

The workforce reductions will be in non-consulting areas, such as human resources, finance, legal, real estate and other business sectors. About half will take place in the United States.

At the same time, HP told InternetNews.com the company plans on hiring about 12,000 new faces in different areas not affected by overlap.

A $1.8 billion savings

Once completed, the restructuring program is expected to save the company about $1.8 billion annually.

But it will hurt HP in the short term. HP expected its services business to bring in about 13 to 14 percent of operating margin in 2009, but that number has been reduced to 9 to 10 percent. In 2010, services should provide between 11 and 13 percent operating margin and 13 to 15 percent in 2011.

"Don't focus on 2009," HP CEO Mark Hurd told the financial analysts during a question and answer session following Lesjak's comments. "Focus on 2010 and 2011 when we get the business optimized."

Illuminata analyst Gordon Haff said he wasn't surprised at the size of the reduction. "When you have a large acquisition like this, you're certainly going to have some consolidation, especially given the corporate overhead functions. I would imagine over time there will be some adjustments."

Even in light of the horrible day on Wall Street, especially for Lehman Brothers employees, Haff said this was expected. "There doesn't seem to be anything here beyond what someone would have expected to happen," he said.

TAGS: HP,acquisitions,mergers,EDS,Mark Hurd



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