Hewlett Packard Enterprise Job Cuts Are Inevitable: Here's Why That's a Good Thing

By Markets Fool.com

Rumor has it that HP Enterprise (NYSE: HPE) may follow in the footsteps of its one-time cohort HP (NYSE: HPQ) and increase the number of previously announced layoffs in the near future. News that HP Enterprise would cut another 3,000 to 4,000 positions over the next three years -- on top of the 3,000 announced earlier this year -- was not taken well by investors. HP's stock is down 7% since it shared its cost-saving plans.

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Will HP Enterprise shareholders suffer the same fate as HP owners should the rumors of additional job cuts come to pass? Not likely. HP Enterprise stock is up 42% year-to-date, so clearly its existing restructuring plan to shavesome of its global workforce hasn't scared off investors. Nor should an announcement from CEO Meg Whitman that HP Enterprise may boost its job reduction figure, as rumors suggest, for several reasons.

Image source: HP Enterprise.

Part of the plan

It should be noted that the job cuts currently taking place at HP Enterprise, according to a spokesperson, are nothing more than "previously announced restructuring changes" and not necessarily a precursor to an additional reduction of its workforce.

However, recent moves by HP Enterprise to spin off and then merge its second-largest business unit (as measured by revenue) with Computer Sciences Corp. (NYSE: CSC) will pare a significant number of its 250,000 or so employees. The much-anticipated move to merge with CSC, which is expected to close in early 2017, will accomplish more than cutting HP Enterprise's overhead -- as critical as that initiative is going forward.

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HP Enterprise shareholders will become 50% owners of the "new" CSC upon closing, in a deal valued at an estimated $8.5 billion. Not only will the combined company shave around $1 billion in expenses in the first year, but HP Enterprise will rid itself of $2.5 billion in debt, boost free cash flow, and be in a position to focus on higher-margin software defined data center (SDDC) and infrastructure services.

There are similar upsides for HP Enterprise shareholders with its more recent deal to spin off and then merge its "non-core software assets" with U.K.-based Micro Focus (NASDAQOTH: MCFUF). The Micro Focus arrangement is valued at $8.8 billion and, similar to the CSC spinoff, includes a 50.1% ownership stake in the combined company.

The Micro Focus merger also includes a $2.5 billion cash payment to HP Enterprise, butits relatively small size -- the software unit generated $718 million in revenue last quarter, compared to the enterprise services group, which reported $4.7 billion -- means it won't have the same positive impact on cutting expenses as the CSC agreement.

Where to from here

Even before the split with HP, Whitman expected to reduce approximately $2.5 billion in overhead due to the aforementioned restructuring and expense management efforts. HP Enterprise's objective has always been to become a leaner, more agile company in the fast-paced world of the cloud, SDDC, and mobile. And it's working.

Despitean additional $345 million expense compared to last year due to restructuring charges in its third quarter, and even factoring in a one-time gain of $2.17 billion for its H3C divestiture, HP Enterprise still managed to shave $1 billion in overhead compared to 2015. The better news is that the results of HP Enterprise's cost-cutting efforts are becoming more tangible with each passing quarter.

For example, HP Enterprise reported a 6% decline in revenue year over year last quarter, but still managed to generate a 34% jump in operating earnings after accounting for the one-time H3C credit and margins also increased.

HP Enterprise should continue to deliver strong bottom-line results given its penchant for minimizing costs. And if that means taking another look at its existing restructuring plan and increasing its scheduled job cuts, so be it. Some investors still prefer tightly run ships that generate profits, which HP Enterprise is positioning itself to do for years to come.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.