HP python aims to swallow another elephant
With his biggest acquisition to date, Hewlett-Packard Co. Chief Executive Mark Hurd might prove how ruthless he can be.
Since he took the helm three years ago, Hurd has driven the Palo Alto company back to the top of the computing industry by cutting costs. He’s done it relentlessly and without sentimentality, repeating the efficiency mantra every quarter -- even as the company’s fortunes improved.
That approach would get its biggest test yet as HP tries to absorb the 140,000 employees of Electronic Data Systems Corp., the Plano, Texas-based technology outsourcing company that HP said Tuesday it would acquire for $13.2 billion in cash.
“This is an order of magnitude bigger than what he has done before,” said Fariborz Ghadar, director of Pennsylvania State University’s Center for Global Business Studies.
Hurd, 51, indicated Tuesday that job cuts loomed as HP tried to improve its position in the market for data-center management, consulting and other high-tech services.
“We think we know a lot about how to look at overhead and how to look at costs that result from overhead,” he said during a conference call with analysts. “So think of us doing a lot of work that we know how to do and have done at HP.”
Some investors worried that this time Hurd had bitten off more than even he could chew. They have knocked more than 10% off HP’s stock since reports Monday that the two companies were close to a deal. HP shares tumbled $2.56, or 5.5%, to $44.27 on Tuesday.
Including Electronic Data’s net debt, HP values the acquisition at $13.9 billion. Electronic Data shareholders would get $25 a share, or $13.2 billion. The combined firm would have 210,000 employees in 80 countries who focus on technology services. That could create an integration headache.
Analysts also fretted that HP was overpaying for Electronic Data by offering a 25% premium over Friday’s closing stock price. The company has struggled in recent years and faces stiff competition from technology services companies based in the United States, India and China.
The deal is expected to close in the second half of the year. It would be HP’s largest since its $19-billion deal -- overseen by Hurd’s predecessor, Carly Fiorina -- for Compaq Computer Corp. Hurd’s other big acquisitions include software companies Mercury Interactive Corp. for $4.5 billion and Opsware Inc. for $1.6 billion.
By buying Electronic Data, founded in 1962 by H. Ross Perot, HP would have to absorb a different corporate culture. Ghadar said Electronic Data had more of an entrepreneurial spirit than HP, which is more methodical in decision-making.
It’s not the first time Hurd has faced skepticism. When he took the helm of NCR Corp., which sells automated teller machines, retail equipment and other tech products and services, in 2003, he showed he could turn around a struggling company with an entrenched culture. He repeated the trick when he joined HP in 2005.
In 2006, he used the cost-cutting mantra to stay above the fray during a scandal involving outside consultants working for HP who used questionable methods to investigate directors and news reporters. HP has become the No. 1 seller of personal computers and expects to generate more than $114 billion in revenue during its current fiscal year.
“He’s created a mythology around his ability to ask detailed questions,” said Paul Roehrig, principal analyst at Forrester Research. “He demands of his management team an exceptional level of operational control.”
Under Hurd, HP has laid off 15,200 workers, about 10% of its workforce at the time, and consolidated business processes. For example, the company reduced its number of corporate data centers to six from 85 and the number of software applications to 60 from 1,600, saving as much as $1 billion in three years. The company has also cut by 25% the buildings it uses in the Bay Area.
He also scrutinized sentimental areas of the company that William Hewlett and David Packard founded in 1939, such as reorganizing the vaunted HP Labs research center to focus on fewer projects.
“By sticking with his sharp pencil to look at places to make cuts and not overspend, he took [HP] pretty far,” said Tom Smith, an analyst at Standard & Poor’s Equity Research. “With Hurd’s record, I’m willing to give them the benefit of the doubt that they can achieve large and meaningful cost cuts in this merger.”
Hurd essentially plans to keep Electronic Data as an island -- a new HP business group called EDS would be based in Plano and led by Ronald A. Rittenmeyer, the company’s current chairman, president and CEO. He would join HP’s executive council and report to Hurd.
Separately Tuesday, HP reported a 23% increase in its fiscal second-quarter earnings. In preliminary results, HP said it earned 80 cents a share during the quarter ended April 30, up from 65 cents during the same period last year. Revenue rose 11% to $28.3 billion from $25.5 billion.
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