Business

The decision by Hewlett Packard Enterprise (HPE) to spin off its Enterprise Services Business and merge it with Computer Sciences Corporation (CSC) was a “next logical step” for the companies, CSC CEO Mike Lawrie said on HPE’s May 24 second-quarter earnings call. Over the past few years, both CSC and HPE had “embarked on critical turnarounds and broad-based transformations,” he said. The turnaround strategy of Hewlett Packard was the more publicized of the two as the computer giant split itself into two companies, with HP remaining in the PC business and HPE focusing on data center products and services. Lawrie and HPE CEO Meg Whitman joined their respective companies within about six months of each other, and both companies “have been on upward trajectories with significant improvements in financial performance and in client satisfaction scores, and the progress has been real and it has been measurable,” said Lawrie.

Both CSC and HP also separated last year within a month of each other to become “more client-focused pure-play entities, aimed at specific markets and core industries,” he said. The merged company “will be a global top three leader in IT services, one that’s uniquely positioned to lead clients in their digital transformations,” he said, adding that the organizations are “highly complementary.”

The deal to create what will be a $26 billion pure-play provider of global IT services “will be very beneficial to customers, employees and shareholders” of each company, said Whitman on the call.

HPE’s “focus is going to be on next-gen software defined infrastructure” with its strong portfolio of servers, storage, networking, converged infrastructure, Helion cloud platform and software assets, she said. The standalone HPE will be “well-capitalized, so we don’t necessarily think there is a need for acquisitions,” she said. However, “if we find the right companies, we certainly will move,” she said, adding that the kind of purchases that have been successful for her company in the past included those with “complimentary technologies that we can put through” the strong HPE distribution and support system, she said. “We will keep our eyes out for those kinds of acquisitions,” but “there aren’t a lot of those around,” she added.

This was the right time for such a deal because HPE believes its sector will consolidate, and it’s” better to be on the front end of the consolidation play than the back end” of it, she said.

There’s “more than meets the eye” in the CSC-HPE deal, Oppenheimer analysts said in a research note May 25. HPE shareholders will get 50% of CSS, while HPE will receive a one-time $1.5 billion payment and move $2.5 billion in liabilities to CSC, the report said. The “interesting part” of the deal is that the liabilities transferred will comprise $1.9 billion in HPE debt and $600 million in HPE pension liability, it said. The pension liability will comprise $2.4 billion in gross liabilities funded by $1.8 billion in off-shore cash, it said. “Not only is HPE getting rid of liabilities, its mix of on/off-shore cash is immediately enhanced,” it said.