HP announces 24,600 job cuts, takes one-time $1.7 billion EDS charge

"With the acquisition of EDS, HP has the industry's most comprehensive portfolio of IT solutions to help customers manage and transform their technology environments," HP said.

The job cuts, the Palo Alto, California-based company said, would allow HP "to restructure the EDS business group to streamline costs, invest in growth and drive shareholder value."

According to the company, most the job cuts would take place in the US coming from within the EDS ranks, with about half the jobs being replaced in new areas of its service business.

At the time the merger was announced in May, HP had 1,78,000 employees on its books and EDS had 1,42,000 employees. In India, HP has over 30,000 employees.

The vast majority of the job cuts would focus on eliminating overlapping jobs at EDS in corporate functions such as legal, accounting, information technology (IT), human relations, procurement and other support departments as well as excess office space, HP said.

The company said it would provide employees affected by this restructuring program with severance packages, counseling and job placement services.

The $13.9 billion acquisition of EDS, a deal which closed last month, strengthened HP's presence in the US and in Britain, two strong markets for EDS, both among government agencies and commercial clients, and made HP the world's second largest provider of IT services, up from No.5 previously. IBM is currently the world's largest provider of IT services. HP and EDS had a combined $38.8 billion in services revenue last year. In comparison, IBM had $51.4 billion in total technology and business-services revenue in 2007.

The deal also made HP the No.1 provider of "applications management" i.e. providing maintenance and outsourced management of older software systems.

"We are good at integrating companies...I believe we will do it well," HP Chairman and CEO Mark Hurd said, recalling the company's 2002 mega-merger with Compaq Computer and a series of software deals HP has made in recent years to bolster its business of helping companies automate and manage their networks and systems.

After the $18.9 billion Compaq deal, HP cut 16,800 employees, or about 11 percent of the combined workforce.

HP also said it would record a charge of $1.7 billion in the fiscal fourth quarter ending in October relating to the restructuring program. Accounting for goodwill would cost $1.4 billion, while cost of the restructuring would involve another $300 million, it said.

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

"HP has a strong track record of making acquisitions and integrating them to capture leading market positions. We will deliver on the promise of HP and EDS for our customers and shareholders," Hurd said, adding, "This is big and important to us. We know what we're doing."

According to HP CFO Cathie Lesjak, the integration of EDS into HP would cut into HP's net profits in its current fourth quarter ending in October and the 2009 fiscal year before turning positive during 2010.

"We do expect to emerge from this transformation with a very competitive cost structure and a much stronger presence with enterprise customers," Lesjak said.

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

According to industry analysts, the job cuts were expected as the company is seeking to put in place the most efficient cost structure that directly relates to the company's ability to scale and grow and address the diversity of its markets and customers worldwide.

"Hurd is doing the hard work to make the investment pay off," said Roger Kay, president of research firm Endpoint Technologies Associates in Wayland, Massachusetts. "There's going to be a lot of interim pain."

"A headcount reduction over a multi-year period makes sense," said Michael Cuggino of Pacific Heights Asset Management in San Francisco, which owns 3,70,000 HP shares. "As a shareholder, I'm happy to see it. It shows they are executing the plan they put out there."

According to Christine Ferrusi Ross, an analyst with Forrester Research, HP could realize some savings by reworking the heavy cost structure of EDS. Some of that would involve sending more jobs offshore to low-cost locations, something competitors like IBM have pursued aggressively.

HP could also stand to gain by selling more of its hardware through discounts, Ross said.

"HP can give financial incentive to EDS customers so they will get a good deal on HP hardware," Ross said. "Before, EDS sold a lot of Sun equipment. If half of the deals go from Sun to HP, that's a big boost."

"It's not an unexpected move, as deals of this size usually involve significant operating expense overlap, including redundant jobs," Brian Babineau, storage and data center analyst at Enterprise Strategy Group, said. "It's unfortunate, but kudos to HP for being blunt in a time where disclosure is not necessarily respected."

"Over three years is respectable as well; it gives time for people to leave on their own terms. People underestimate that," he said.

According to Sanford C. Bernstein analyst Rod Bourgeois, typically, when a company the size of EDS is bought, it loses about 8 percent to 10 percent of its workforce.

"That's kind of a rough rule of thumb," he said.

The Plano, Texas-based 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.