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May 25, 2016

HPE, CSC services spin off and merger looks set to create $26bn behemoth

News: New business entity will be focussed on helping digital transformations succeed.

By Ellie Burns

HPE has announced a tax-free spin-off and merger of its Enterprise Services business with CSC.

HPE will own a 50% stake in the new combined entity and will nominate half of the board members. While HPE’s Meg Whitman will be on the new company’s board, it will be led by CSC’s current CEO, Mike Lawrie.

The spin-off is expected to fetch a cost saving of around $1bn for HPE.

Whitman said: "The ‘spin-merger’ of HPE’s Enterprise Services unit with CSC is the right next step for HPE and our customers.

"Enterprise Services’ customers will benefit from a stronger, more versatile services business, better able to innovate and adapt to an ever-changing technology landscape."

The transaction is planned to be completed by 31 March 2017. HPE shareholders will own shares of both HPE and nearly 50% of the new company.

CSC chairman, president and chief executive officer Lawrie said: "As a more powerful, versatile and independent global technology services business, this new company will be well positioned to help clients succeed on their digital transformation journeys.

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"Together, CSC and HPE’s Enterprise Services will have the scale, foundation and next-generation technologies to innovate, compete and grow in a rapidly changing marketplace."

The new company is expected to earn annual revenues of around $26bn, with over 5,000 customers in 70 countries.

CSC’s current CFO, Paul Saleh, will continue to remain in the role in the new company after the completion of the transaction.

HPE said that one-time costs associated with the separation of the Enterprise Services segment from HPE will be offset by lower costs involved in the fiscal 2015 restructuring plan.

The transaction is expected to deliver nearly $8.5bn to HPE’s shareholders on an after-tax basis.

Buoyed by income from its server and storage business units, HPE also reported a 1% increase in net revenue for the second quarter ending 30 April – the first rise in five years. Revenues topped $12.7bn in the fiscal second quarter, up from $12.5bn posted in the same quarter last year.

HPE president and chief executive officer Meg Whitman said: "The businesses comprising HPE grew revenue over the prior-year period on an as reported basis for the first time in five years.

"We also had strong quarterly performance in every one of our business segments and generated more than $500 million in free cash flow."

The Enterprise Business saw a 7% increase in revenues to $7bn, largely driven by a 57% rise in networking revenue. While the revenue from servers was up 7%, storage revenue went up by 2%.

The company’s revenue from enterprise services fell 2% to $4.7bn, with application and business services revenue down 3%. Software revenue also dropped, sharply, by 13% to $774m in the quarter, mainly due to a fall in license and support revenues.

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