Deutsche Bank Examines Hewlett-Packard's Services Business

In a report released this morning, Deutsche Bank reexamines Hewlett-Packard Company's HPQ business “with particular focus on the margin and growth dynamics of this business since the EDS transaction (deal in May 2008).” “Our initial view of the deal (see EE #139: A closer look at the HP-EDS combination, originally published 5/19/08) centered on concerns that many of the challenges facing EDS appeared to be structural in nature (asset location) and that the HP/EDS combination would fall short of competitive offerings (vs. ACN, IBM etc) in terms of vertical industry knowledge, consulting capabilities and globally integrated services delivery platform.” “Since the EDS deal closed,” Deutsche Bank continues, “HP (under the former CEO) focused on cost cutting (not investment) with the elimination of ~25K heads (with 50% replacement in low cost geos) and several large restructurings which led to meaningful improvement in margins (HP Services OMs ~7-8% proforma pre-deal to ~15% in most recent Q) and EPS (added ~$1 of nonGAAP EPS between FY08 and FY10).” Hewlett-Packard closed Friday at $35.98.