HP-EDS Merger Could Bring Massive Job Cuts

One analyst group says it thinks HP may have to cut up to 50,000 jobs.

Hewlett-Packard shook up the technology world May 12 by announcing that it would be buying IT services giant Electronic Data Systems.

The companies plan to spend the next six months hashing out the details of the $13.9 billion deal, and while a HP spokesperson said it is too soon for the company to discuss its plans for combining the work force, one thing is clear: There will be job cuts.

During a conference call to reporters May 20, HP CEO Mark Hurd made clear that the company would do what was necessary to make the acquisition profitable.

"Make no mistake, we will get the cost right and we will create value for our shareholders," Hurd said.

While most observers are quick to note that HP and EDS don't have a lot of overlapping businesses, few mince words about the improvements that will be needed to make EDS worth the high ticket price.

"There's going to be a lot of operational improvements needed at EDS. When you combine organizations, it always gives you a chance to cut out overhead. We're definitely talking in the thousands," Lindy Hanson, an analyst with TBR (Technology Business Research), told eWEEK.

In fact, when TBR did its own brief analysis comparing the revenue and headcount at what will be the HP and EDS combined services group with IBM Global Business Services, an industry leader, it estimated that HP-EDS will have to cut 50,000 jobs to get the combined companies to a similar level of revenue.

However, the odds of the company slashing headcount this dramatically, especially at the start, are slim.

"You have these huge contracts that EDS manages and to make significant reductions in headcount is difficult without bringing in new technologies that would help automate some processes ... They will have to do this carefully," Hanson said.

Such large job losses could also be devastating from an employee morale perspective, something that large companies can easily overlook when arranging deals this big.

"The greatest pitfall a company will have in situations like this is around communicating with the rank and file. They need to communicate early and often, and be consistent," Jim Lanzalotto, vice president of strategy and marketing at Yoh Services, a provider of talent. and outsourcing services, told eWEEK. "There's a lot of fear of job loss, and workers want stability-especially in a fairly tough job market."

It can take a long time for the workers who remain to feel calm again, as the realignment process can spread over the course of years.

"The agita over a merger happens from the time it's announced to two years later. What kind of work am I going to be doing? Will it change? Are [we] done downsizing? It's a tenuous time," Lanzalotto said.

Keeping customers, shareholders and the work force calm during the review process will be no small task, but most have confidence that Hurd is up to it. At the very least, the company is expected to integrate EDS more smoothly than it did Compaq in 2002.

"Compaq was a challenge, but Hurd wasn't there yet. I'm still surprised by how well HP continues to do, and a big part of that must come from leadership. If anyone can bring a company like EDS successfully into the fold, Hurd seems like the guy to do it," TBR analyst Josh Farina said.