August 18, 2009 / 4:25 PM / 10 years ago

DEALTALK-HP could prune outsourcing services -sources

* May divest or fold parts of outsourcing business-sources

* BPO unit’s revenue was $709 mln in last quarter-filing

* Some low-margin BPO may be kept if strategic-source

* Fiscal third quarter results expected later Tuesday (For more Reuters DEALTALKs, click [DEALTALK/])

By Anupreeta Das

NEW YORK, Aug 18 (Reuters) - Hewlett-Packard Co (HPQ.N) is considering selling or shutting parts of its outsourcing business to focus on the higher-margin areas of its technology services offering, people familiar with the matter said.

A year after buying Electronic Data Systems for $13 billion, HP executives are discussing the possibility of divesting parts of the outsourcing operations, especially in its business process outsourcing (BPO) arm, sources told Reuters.

“The calculation is, can we get more cash for this asset now versus the cash flow the asset is expected to generate in coming years?” said one of the sources who is familiar with HP’s plans.

HP’s India operations or its human resources BPO unit could be among the businesses divested, the source added.

Housed within HP’s services division, the BPO unit posted $709 million in revenue in the quarter ended April 30, compared with $40 million a year ago. HP got most of its technology outsourcing and BPO business from EDS, a pioneer in the field, which it bought in August 2008.

HP may decide not to sell anything if the assets fail to fetch a good price, the sources said.

If the assets were to be shopped, outsourcers like TeleTech (TTEC.O) and Stream Global Services OOO.A could be interested, a second source said.

HP is expected to issue its fiscal third quarter results later on Tuesday.

IN THE MARGINS

HP views business process outsourcing, which provides back-office support to clients, as a low-margin business that is not central to its growth plans, the sources said.

“I don’t think it’s lost to anybody that (CEO) Mark Hurd doesn’t like the BPO industry,” said the second source. “At some point, he is going to look at shedding the BPO revenue, although this may not be the right time because of valuations.”

The company currently trades at roughly 10 times estimated 2010 earnings, below rivals IBM, Cisco Systems Inc (CSCO.O) and Dell Inc DELL.O. HP also has a lower services operating margin than IBM.

However, margins are not the only consideration when it comes to determining which parts of the BPO business to sell and which parts to keep, a third person familiar with the matter said. It likely will keep BPO operations that complement HP’s hardware and software offerings even if they are low margin, the source said.

HP declined to comment for this story. The sources spoke anonymously because the discussions are confidential.

Hurd, who became chief executive in 2005 after Carly Fiorina stepped down, is known on Wall Street for being an aggressive cost-cutter.

Under Hurd, the Palo Alto, California-based company has challenged IBM’s dominance in IT services. HP has also taken on Cisco Systems Inc (CSCO.O) in networking equipment, as PC sales continue to fall. Analysts and bankers expect HP to now focus on buying software, storage and communications equipment companies rather than services.

SEARCH FOR SAVINGS

The EDS purchase is HP’s largest acquisition since the $25 billion Compaq merger in 2002. It has pushed HP to the No. 2 spot in global IT services after International Business Machines Corp (IBM.N).

Under the deal, HP folded EDS’s back-office services into its own outsourcing business. HP also undertook a four-year restructuring plan that includes cutting 25,000 positions and saving on expenses by combining operations.

More than halfway into integrating EDS, HP has cut about half those jobs at the unit. It expects to realize about $1.8 billion in net savings through the deal.

Savings realized so far have helped HP increase operating margins in its services business, Sanford C. Bernstein analyst A.M. Sacconaghi wrote in a July research note.

But its consulting and outsourcing operations, which fall under the services group, continue to see operating margins of 8 percent to 9 percent, well below rivals IBM and Accenture (ACN.N) as well as offshore services providers, Sacconaghi said. He sees opportunities for more cost cuts and margin improvement. (Reporting by Anupreeta Das; Editing by Tim Dobbyn)

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