HP, EDS Close IT Services Merger at Cost of 24,600 Jobs

Hewlett-Packard Sept. 15 laid down the strategy it will use in its quest to close the market gap it faces behind IBM, the world's No. 1 IT services vendor, and that strategy comes at a cost in something more valuable than dollars: human resources.

Hewlett-Packard said it would cut 24,600 jobs as part of its $13.9 billion acquisition of Electronic Data Systems—announced May 14—in order to drive corporate efficiency and eliminate redundant positions, Reuters reported. The job cuts amount to about 7.6 percent of the combined company's total work force of about 320,000.

Hewlett-Packard said it would take a one-time charge of $1.7 billion in its fiscal fourth quarter to handle the integration of EDS' worldwide operations. HP also said it expects the restructuring to result in annual cost savings of $1.8 billion. HP common shares fell $1.64 on the day to close at $45.33.

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The completed EDS deal will give HP about a $22 billion market cap. EDS provides market value of about $10.5 billion. However, EDS experienced some fiscal trouble in April, just prior to the merger. EDS reported a 62 percent drop in profits for the first quarter to $62 million.

The global IT services market has been estimated by IDC and Gartner to be worth about $50 billion per year. IBM owns about 22 percent of the global market, good for approximately $11 billion per year.

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

For example, Lehman Brothers, which filed for bankruptcy Sept. 14, revealed a number of financial disclosure problems as part of its case.

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

The quest to be No. 1

Hewlett-Packard is making a major play to become the world's No.1 go-to shop for building next-generation data centers and is relying heavily on the addition of EDS' well-established service business to help it gain 4 percent of the burgeoning world IT service market. That would give it about 7 percent overall—some 15 percent behind IBM.

"Of course, that's been [HP's] strategy all along," David Hill, senior analyst with the Mesabi Group, told me. "They and IBM are very big on building the next-generation data center. These acquisitions make a lot of sense that way."

HP's overall plan to build its own in-house, all-purpose build-a-data-center capability began in 2002 with the controversial decision to acquire server and PC computer maker Compaq, which had checkered results. The strategy continued for the next six years with the acquisition of 15 software companies, including Opsware, Mercury Interactive and Peregrine Systems.

The culmination of the strategy is the acquisition of the services provided by EDS and EYP Mission Critical Facilities, the second-largest data center designer and builder in the U.S. market.

"[HP CEO Mark] Hurd is trying to build an organization that largely reflects what IBM has already done," said Charles King, chief analyst with Pund-IT. "They have a lot of the pieces that you need to have in place. But they still face some really serious challenges to catch up with IBM, though."

Editor's note: This story was updated to correct the total number of employees in the combined company from 220,000 to 320,000.