HP Enterprise has announced that it will spin off its Enterprise Services division, which will then merge with Computer Sciences Corporation. CSC has been described as both a “competitor” and a “complementary” organization, depending who you ask. The move enables HP Enterprise to focus on software and on hardware such as servers, storage, and networking.
HP Enterprise is, of course, one half of the old Hewlett Packard (the other half being HP Inc., which focuses on printers and consumer products). The company cut 30,000 jobs in that move, and will move another 100,000 positions — 2/3 of its total — to the new company.
HPE shareholders will own 50% of the new company (worth $4.5 billion), as well as receiving a $1.5 billion special cash dividend and the assumption of $2.5 billion of HP Enterprise Services-related debt, bringing the total value of the deal to $8.5 billion on an after-tax basis. The new company, which is expected to have $26 billion in annual revenue, will be helmed by CSC’s Mike Lawrie as CEO, President, and Chairman, with HPE CEO Meg Whitman joining the new company’s Board of Directors. Other board appointments will be split evenly between nominations from the two companies.
Although some pundits were calling this a negative for OpenStack, Whitman was more nuanced in her explanation to Jim Cramer. She explained that while yes, CSC was primarily an AWS shop (and a VMware shop, according to The Register), HPE will have a three year agreement with the new company to continue to service customers, with a goal towards steering some of those workloads to hybrid clouds that include HP hardware and (OpenStack, presumably) software. After that, she said, “We’re going to have to compete for that business over time with ES, and we’re happy to do it.”
Not all analysts were positive about the deal. According to Investors Business Daily, “Global Equities Research analyst Trip Chowdhry said the HPE services-CSC merger is the combination of two struggling companies and could result in 65,000 layoffs. ‘Two bad assets does not make one good asset,’ he said.”
On the other hand, Jason Kupferberg, analyst at Jefferies, told Investors Business Daily that the HPE-CSC deal has merit. “We believe the combined firm will trail only IBM Global Services and Accenture (ACN) in terms of global IT Services revenue.”
HPE’s Enterprise Services group accounted for about a third of its revenue, so while the new HPE will be smaller and more nimble, it will also lose a significant amount of revenue. Then again, ES was a shrinking segment; in the past quarter it was down 2%, and was forecast to decline further. In fact, “among those who work in other HP Enterprise units “most are glad to get rid of that boat anchor'”, according to BusinessInsider.
The Enterprise Services division has been somewhat downtrodden in the press for some time. Recode said that, “The move will also unwind what in hindsight has turned out to be one of the worst acquisitions in the old HP’s history, the $14 billion acquisition of the IT services firm EDS, consummated in 2008 under yet another prior HP CEO, Mark Hurd, now the CEO of Oracle.”
“Back in the day, I think being an IT supermarket was a good strategy — scale was important,” Whitman told Bloomberg on Tuesday. “But a lot of things that built a competitive moat five, 10, 15 years ago actually don’t today.”
The move is part of an overall shuffling of service organizations. Dell sold its services arm (formerly Perot Systems) to NTT for $3 billion earlier this year. “We believe the HPE Services plus CSC transaction will cause Xerox (XRX) services to be looked at as an acquisition target, as well as put pressure on IBM to consider making acquisitions in its services business,” Citigroup analyst Jim Suva said in a report quoted by Investors.com.
The deal is expected to close by March 31, 2017. A name for the new company has not yet been announced.
- CSC Announces Merger with Enterprise Services Segment of Hewlett Packard Enterprise to Create Global IT Services Leader | Business Wire
- Hewlett Packard Enterprise Announces Plans for Tax-Free Spin-Off and Merger of Enterprise Services Business With CSC Hewlett Packard Enterprise (HPE)
- Hewlett Packard Enterprise to spin off IT services unit, merge it with CSC | ZDNet
- Hewlett Packard Enterprise will spin off its troubled services business in an $8.5 billion deal – Recode
- How IBM, Xerox Impacted By HPE Services Spinoff, CSC Merger | Stock News & Stock Market Analysis – IBD
- HP Enterprise To Spin Off, Merge IT Services Division With CSC – Business Briefing on CIO Today
- HP Enterprise unit’s merger with CSC no shield from cloudburst | Reuters
- HPE announces spin-off of enterprise services business, and merger, with CSC.
- HPE spins out enterprise services business into CSC • The Register
- Update: HPE to spin out its huge services business, merge it with CSC | Computerworld
- A Hewlett-Packard Spinoff Is Preparing to Split Again – The New York Times
- Hewlett Packard Enterprise – Enterprise Service Spin-Off Makes Sense, Reveals Value Of The Core – Hewlett Packard Enterprise (NYSE:HPE) | Seeking Alpha
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- HP Enterprise Gets Smaller by Selling Services Division – ABC News
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