HP unleashed a raft of news this morning, but the headliner of the bunch is that it’s taking an $8 billion write down, due to a goodwill impairment on its $13.9 billion EDS acquisition.On the one hand, HP’s 2008 EDS acquisition could be seen as one of the worst acquisitions in history.
On the other, today’s $8 billion write-off from the services business is actually good news in the long-term, IDC market research analyst Crawford Del Prete told Business Insider this morning.
When HP bought EDS it folded in HP’s smaller services arm and renamed it HP Enterprise Services (HP ES). This group handles outsourcing contracts for HP. EDS nearly doubled HP headcount because it had 139,500 workers to HP’s 172,000. Since then it’s seen constant layoffs and management changes. HP shed 25,000 workers as of 2011, another 5,000 or so in the beginning of 2012, HP employees told us earlier this year.
So why is HP ES so hard hit?
“It’s not like there was a lot fat to trim in these other parts of business. And services is a people-based business. So it wasn’t surprising to me that if you are going to go after to cost, you are going to go after costs in the services business,” Del Prete said.
He says several other factors meant whittling HP ES down was a good — or at least rational — decision on HP’s part.
- Because of the turmoil surrounding HP, global companies weren’t hiring HP for major, multi-billion outsourcing contracts anyway. The unit was in a downward spiral.
- Outsourcing is a dying business anyway. “Our research suggest those mega deals were on the decline for a series of years now,” Del Prete says. In fact that kind of decline was in the works when HP bought EDS and HP got “tripped up on that.”
- HP’s most promising services business — fixing the hardware it sells when things break (PCs, servers, printers, network gear), isn’t part of the HP ES unit. That’s run by the newly formed Enterprise Group under Dave Donatelli.
- HP ES can be fixed so that it does a few things really well: helping companies update their old custom applications to take advantage of new technologies like the cloud, helping companies merge multiple database or multiple management systems (after a merger, for instance) and so on. It needs a lot less people for those services than it does for big outsourcing contracts.
And ultimately, HP is able to tell investors that these cuts are boosting the bottom line. HP raised the outlook for Q3. Its non-GAAP EPS is $1.00, up from $0.94-$0.97.
“They raised their guidance. It’s important to note that. What I’ve been wanting to see is stabilisation. They raised guidance so it shows their business is stabilizing. They are starting to see benefits from some focus and retrenching,” he says.