Has any large American company been so thoroughly transformed in recent years as Hewlett Packard? I started thinking about this when I heard the company planned to lay off 24,600 employees in the wake of closing its purchase of EDS in August. That represents about 7.7 percent of the combined workforce. On average, post acquisition layoffs range from 7 to 10 percent.
Still, the raw number underlying that percentage represents the latest in a series of dramatic moves to reshape this valley icon. First under Carly Fiorina, and now under Mark Hurd, the company is almost unrecognizable from the company that began this century. The most obvious signs of this are the blockbuster acquisitions: Compaq, Mercury Interactive, Opsware, and now EDS.
But underlying those big moves is the enormous upheaval within the ranks of HP and the companies it has acquired. To get a sense of how profound this has been, I went back to look at some of the numbers related to HP’s various restructuring announcements. By my count, including the enhanced retirement plan offered in 2007 and the EDS cuts, HP has gone through seven rounds of restructuring since 2002.
When the latest EDS cuts are completed, a process expected to take at least three years, the company will have announced lay offs of 57,500 since 2002. The total cost of laying off that many people: $9.01 billion dollars, about half of that in cash. I’ll explain how I got that figure in a moment.
Of course, these cuts only tell part of the story. Because while HP was ushering people out the door, it was busy letting even more in. Before the 24,600 layoffs announced this week, HP had already laid off 32,900. But during that same time, before the EDS merger, it’s total employment had grown to 178,000. That means while 32,900 jobs were eliminated, almost 60,000 were added back. At a company that once valued long-term employment, about one-third of its employees joined within the past six years. Can you think of another company the size of HP that has churned through that much of its workforce this decade?
Following such restructurings, executives like to emphasize the cost savings. In the announcement this week, CEO Mark Hurd said the company would achieve annual savings of $1.8 billion once the layoffs are completed in 2011. But don’t expect that savings to necessarily show up in the bottom line. First, the company has also said it would hire another 12,300 or so folks back. Then factor in that other divisions of HP will continue to grow, and that some of that money will be reinvested elsewhere, and there won’t be a drop in expenses. Instead, there will be a reallocation of resources.
As Hurd said this week to analysts:
“I am a big believer that having the most efficient cost structure directly relates to your ability to scale and grow. We’ve got to do tough stuff.”
But aside from savings, there also costs. Including the latest round, HP will have incurred $6.6 billion in restructuring costs for severance and other related items. But that understates the actual total. In the announcement this week, Hurd explained that of the $1.7 billion charge the company will take related to the EDS restructuring, only $300 million will be counted against earnings. The other $1.4 billion will get added into the cost of buying EDS.
So what? That $300 million will count against HP’s profit next quarter. The $1.4 billion will go on the balance sheet where it is categorized as something called “goodwill” and won’t immediately affect profits. HP must test and occasionally reduce goodwill over time, and when it does, it must reduce its profits by a similar amount. The main point here is that HP can spread the cost of firing EDS employees over a number of years, which makes it in a sense less expensive in the short term for HP to fire EDS employees. If EDS had stayed independent and fired the same number of folks, it would have had to take an immediate hit on earnings.
To be clear, this kind of treatment is perfectly normal and legal under accounting rules. HP used this same accounting method when it acquired Compaq in 2002. The company incurred $960 million in charges for Compaq related layoffs that were added into the balance sheet, rather than reducing profits. And when HP bought Mercury Interactive in 2006, it did the same thing: $58 million in restructuring costs hit the balance sheet, not the income statement.
So officially, HP has recorded $6.6 billion in restructuring charges. But in fact, the real tally is closer to $9.01 billion.
Was that the best use of corporate assets? Depends on how much savings HP has achieved since 2002. And for reasons I noted above, that’s harder to deduce. Assuming all the cuts kick in by 2011, the company would have needed to achieve an average of $1 billion in annual savings.
It seems clear that EDS was certainly in need of some kind of kick in the pants. According to a Bloomberg story this week:
Hewlett-Packard generated eight times as much profit per employee as EDS last year. Hewlett-Packard had earnings of $42,200 per worker in fiscal 2007, which ended in October of that year, compared with $5,130 at EDS, according to data compiled by Bloomberg.
Whatever the wisdom of all this, a couple things are clear. First, HP has overtaken Dell as an industry leader and has tremendous momentum. And second, shareholders are clearly pleased: The stock has more than doubled since Hurd took over in April 2005.