Why HP’s $8 Billion Write Off Is Not All Bad News
The good news is that Hewlett-Packard (NYSE:HPQ) has raised its outlook for the coming quarter, expecting an EPS of $1 per share, up from $0.94 to $0.97 a share. The Q3 fiscal 2012 EPS estimates exclude after-tax costs related primarily to the amortization and impairment of purchased intangible assets, goodwill impairment charges, restructuring charges and acquisition-related charges.
It also announced that it will be writing down $8 billion in value of Enterprise Services, mainly related to the EDS acquisition in 2008. The loss is in the form of a non cash pre-tax charge for the impairment of goodwill. The Enterprise Services Company is a division of HP that was created after it purchased EDS for $13.9 billion in 2008. HP most likely overvalued the worth of the acquired assets, which might have been appropriate during the purchase period but is now being written off due to the recent trading values of HP’s stock, the current market conditions and current business trends. [1]
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Dealing With Complexity
When HP acquired EDS, the combined entity was HP Enterprise Services and this is the services company that handles HP’s outsourcing business. The EDS acquisition added nearly 140K workers to HP’s existing 170K employees and since then HP has been managing constant layoffs, especially in the services division. Its outsourcing business has taken a hit mainly due to this increased complexity and constant management changes.
With outsourcing demand slowing, right after the acquisition and continued aggravation due to the Eurozone crisis, the benefits from the acquisition and the increased manpower have not worked out as planned and has lead to the write-offs and restructuring. The write-off signals that HP is likely to focus on its more profitable business lines and restructure the services division to be more efficient and profitable. [2] Ultimately we believe this renewed focus is a positive and supports our outlook for the company.
We currently have a $32.48 Trefis price estimate for HP, which is much higher than the current market price.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- HP Newsroom, www.hp.com, Aug 8, 2012 [↩]
- HP $8 Billion Write off, www.businessinsider.com, Aug 8, 2012 [↩]