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Did HP take on 1 company too many, and can't it digest EDS? Yes and no, but it requires some explaining. In short HP ate EDS, and instead of creating a stronger HP it created a stronger EDS as end result.

HP has typically been a hardware manufacturer. You have R&D done to make a new gizmo blueprint. Once the blueprint is ready you have a factory make the gizmo's. The more gizmo's/items you still the higher your revenue and the higher your profit per item (since the fixed cost is spread over the number of items created). When business is booming your revenue and profit skyrocket (we're talking double digits here), but in crisis times when less items are sold they also tumble hard.

Electronic Data Systems on the other hand has always done services/app development/system integration. Revenue there is resource/people related, so is their profit. Suppose you have 1 developer working full-time, you want to double your revenue/profit you need to hire an extra developer, revenue times 2 means developers times 2. So you have a profit per developer. Ongoing services has a little more wiggle room, but it's also resource based in the end. You support 30.000 seats with 600 people, if you make full use of them you will need to hire an extra 200 people to support 40.000 seats. EDS ongoing contracts are mostly multi-year contracts. This all makes that revenue/profit at EDS will rise more slowly than HP's, but it's also more recession proof.

Now for the merged companies, you can view HP as a rocket, and EDS as a buoy. With the takeover the rocket took the buoy onboard. This means that under positive market conditions the rocket will go less high then it used to go with the same fuel (being hold back by the extra buoy weight), but that in recession times the rocket will not hit the sea-bedding as the buoy keeps it more or less afloat. This you can see in the last quarterly earnings report of HP: traditional HP business is hurting a lot, while EDS business remains pretty stable.

Now the HP CEO Mark Hurd is trying to apply a remedy for the situation, but he's applying it to the wrong patient... actually the patient morphed into something else with him looking at it, and he didn't/doesn't realize it yet. Which should make people wonder how "due dilligence" originally was done, but that's another story. Mr Hurd is trying to fix HP, but EDS in the meantime assimilated HP better then the Borg would have done it.

For the final fix Mark Hurd is trying to get HP to behave as it did before it got involved with EDS. However short of breaking off EDS - which will be extremely hard because of the EDS assimilation - there's no solution to get the previous company behaviour back. The traditional EDS services don't allow for that. And if HP/EDS is not careful with what and who they cut out, HP could face gigantic SLA penalties/lawsuits on their EDS business.

The current quick fix Mark Hurd announced recently is cutting the pay of his own salary by 20%, management by 10 to 15% and regular IT personnel by 5%, the rest by 2.5%. First thing to note is that Hurd takes a 20% cut on his salary, not his compensation. So in fact he cuts about 300K USD from his 45 million USD pay, a pay cut of a small 1%. Which makes his gesture a little less credible.

The pay cutback is an american idea for an american problem. People are probably happier to get a 5% (in most regular cases) cut than to be unemployed. However in Europe this pay cut is not a good idea. In England and Belgium this cut was already announced, in Spain they're waiting to get the message out to minimize "riots".
In Europe a company can't cut pay without voluntary approval of each individual. In Europe it's abnormal to take a paycut, it's acceptable in some cases when the firm is on the brink of bankruptcy but for the rest it's pretty much frowned upon... no paycut to maximize shareholder value while the company is still making (less) profit. If cuts are pushed through it will make hiring new people in Europe problematic, it also opens up a lot of potentially expensive legal problems. As employee you don't accept the pay cut, HP fires you, the employee goes to court and probably gets his severance pay and extra damages awarded. As employee you take the paycut, but you get fired nonetheless afterwards: the employee goes to court and gets the severance pay based on his old salary, ...
The only good way to do temporary cuts in Europe is the german way: keep the pay, but have people work less hours for less pay. With a 40 hour work week, 5% is 2 hours per week less, this would be acceptable to most european countries and avoid most of the legal issues. But alas probably not the "Mark Hurd" way. Unions in Europe are already calling out not to take the paycut, since as usual in their rush management forgot to inform/consult them and they kinda don't like that.

So to sum up... HP is not going to show the old investor profile it used to in the current HP/EDS configuration ever, results may improve a bit but a rocket with a buoy is still... well a rocket with a buoy. There will be some employee "riots" especially in Europe. More reductions are expected end of 2009, the 20.000 Mark Hurd is already hinting to. If extra reductions are going to happen investors will probably see this as an extra dark omen.
So my common sense tells me this stock will slowly go down to the 10-20 USD range towards the end of the year 2009 and stay that way for a long time (note for the future: this "prediction" was done end of februari 2009), so if you haven't sold HP stock yet... maybe it's time to sell while you still can.
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