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HP to absorb record loss of $8 billion

SAN FRANCISCO — Hewlett-Packard chief executive officer Meg Whitman, in her drive to boost profitability, took another step toward dismantling the computing empire former CEO Mark Hurd built with $24.3 billion in acquisitions.

HP is writing down the value of its enterprise-services business by $8 billion and shuffling management at the top of the division, the company said Wednesday. That follows an announcement in May that Whitman is eliminating 27,000 jobs, many of them from that unit.

The writedown reflects the dwindling value of Electronic Data Systems, bought by Hurd for $13.2 billion in 2008. The deal pushed Hewlett-Packard into the low-margin business of information technology outsourcing, handled more efficiently by rivals such as Wipro and Tata Consultancy Services. It left the company Whitman inherited ill-equipped for the shift toward cloud computing, making it a laggard in services that help clients deliver software over the Internet.

"She's taking the company toward higher-margin, more strategic categories," said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco. "If she does what she says she's going to do, services is going to be a smaller, more profitable business. She's talking about cloud, analytics and security."

Whitman, CEO since last September, is revamping the services business after saying in December that Hewlett-Packard will turn WebOS into an open-source project. That resolved a debate over how to salvage assets from another Hurd acquisition, the $1.2 billion purchase of Palm Inc. in 2010.

Sales in Hewlett-Packard's services business barely budged last fiscal year, rising 1.2 percent to $36 billion. The division grew less than 1 percent in fiscal 2010.

Within the services division, about 30 percent of sales come from repairing and maintaining machines sold by Hewlett-Packard, which, according to Abhey Lamba, an analyst at Mizuho Securities USA in New York, is a profitable business. More than 40 percent of revenue is from lower-margin technology outsourcing, the business bolstered by the EDS deal.

"The EDS acquisition was not a success for the company, because ever since it occurred, we have not seen strong growth in their services business, and margins have come down," said Shebly Seyrafi, an analyst at FBN Securities in New York.

Whitman's bid to turn around the services business hinges on Hewlett-Packard's ability to build teams that can help companies use modern programming techniques and deliver their applications via cloud computing to become more efficient. At the same time, Hewlett-Packard needs to lessen reliance on the more conventional work of running customers' IT operations.

In the third quarter, Hewlett-Packard said it expects a writedown of about $8 billion stemming from "business trends within the services segment." The company also anticipates a pretax charge of $1.5 billion to $1.7 billion related to job cuts, up from a prior projection of $1 billion.

"They're making changes, but it's going to be several years before they get it right," Seyrafi said. "The charges are a recognition that the prior management strategy did not succeed."

HP to absorb record loss of $8 billion 08/09/12 [Last modified: Thursday, August 9, 2012 11:09pm]
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