The ongoing turbulence in its business operations has forced PC giant Hewlett-Packard Co. (HPQ - Analyst Report) to opt for major restructuring activities. Recently, H-P announced its decision to reorganize its Enterprise Services business by way of shutting down its German unit. The unit is situated at Rüsselsheim and employs about 10,000 employees.
The closure is likely to eliminate 850 positions. The company also announced plans to transfer another 250 employees to its partner companies or clients.
This announcement is a part of its global restructuring plan chalked out in May 2012. Per the plan, which was made to achieve some long term benefits, H-P will focus on reducing the cost structure and realigning the workforce to create investment capacity, support growth initiatives and innovation and enable more effective operations globally.
As part of the restructuring, H-P also expected to announce 9,000 job cuts in fiscal 2012 and cumulatively, approximately 27,000 employees by the end of fiscal 2014.
H-P expects the restructuring actions to generate annualized savings in the range of $3 billion to $3.5 billion exiting fiscal 2014. The refocus of the business involves investment in technology and business processes, as well as the hiring of people with new skill sets, in some cases, at lower-cost locations. On top of the cost savings from head count reductions, the company expects further non-labor savings from supply chain efficiencies and a new price and promotion strategy.
H-P expects to reinvest the majority of savings from head count and non-head count related actions into its business to foster innovation, particularly in cloud, big data analytics, information management and security.
H-P’s Enterprise Services business was not performing as well as expected by the company. The reason was attributed to weak performance by one of the priciest acquisitions ever made by H-P in order to boost the business. H-P recorded a significant charge for its Enterprise Services business in the third quarter of 2012.
The charge was for the Electronic Data System (acquired in 2008 for $13.9 billion). We believe that the current restructuring effort will reduce operating costs and pull up segment margins.
Though the restructuring is encouraging, the benefits may not be felt in the near term. Hence, the stock has a Zacks Rank #3 (Hold). But the stock has an earnings Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method) of -2.8%, which lowers the chances of an earnings beat in its first quarter 2013 earnings announcement on Feb 21.
Due to a lackluster PC market and overall macro uncertainty, most of the technology stocks are not performing well. But we would recommend investors to consider Compuware Corp. , DST Systems Inc. (DST - Analyst Report) and Symantec Corp. (SYMC - Analyst Report), all of which have a Zacks Rank #1 (Strong Buy).