HPE spins out IT consulting and services business into CSC

Hewlett-Packard Enterprise has spun out its Enterprise Services business into CSC, creating an entity with annual revenues of $26 billion and more than 5,000 clients in 70 countries. If all goes according to plan, the deal will close by March next year.

Six months ago Hewlett-Packard split into two companies, Hewlett Packard Enterprise (HPE), containing its services unit and industrial-grade server computers business, and HP, which spans its PC and printing business. While the computing side of HPE has performed well since the split, with revenues up 7% from the same period a year ago, the services unit has been relatively stagnant. In a bid to bolster the productivity and margins of its Enterprise group, HPE has since the split launched a series of restructuring and improvement plans.

On Tuesday, HPE’s Chief Executive Meg Whitman unveiled that the company has spun off its IT consulting and services group (‘Enterprise Services’) to CSC, a move which allows HPE’s remaining business (~$33 billion in annual revenue) to focus on its cloud services footprint and other fast-growing units. For CSC, which too has gone through a recent split*, the merger adds nearly $19 billion to its current circa $8 billion revenue base, creating one of the world’s largest pure-play IT services companies, serving 5,000 clients through, among others, 85 delivery centres and 95 data centres across 70 countries. The new company will focus on supporting clients with digital transformations needs – ever more in demand – through a range of IT related services, including cloud, security, application development and modernisation, big data and analytics, mobility, workplace, and sophisticated business process and IT services.

Through the deal, both companies expect synergies to deliver $1 billion of immediate savings, with $1.5 billion in subsequent years. As part of its carve-out, HPE expects $900 million in separation charges, of which $300 million will be recorded in 2016. The merger between the two giants is set to be completed by March 2017, although it is still subject to both shareholder and regulatory reviews and approvals. CSC is being supported through the deal by financial advisors RBC Capital Markets and legal advisor Allen & Overy. Goldman Sachs & Company is serving as financial adviser to HPE.

“Our proposed merger with HPE Enterprise Services is a logical next step in CSC’s transformation,” says Mike Lawrie, who currently serves as Chairman, President and CEO of CSC – and will continue in the role at the new company. “As a more powerful and versatile global technology services business, the new company will be well positioned to innovate, compete and serve clients in a rapidly changing marketplace. We are excited by the great potential this merger brings to our people, clients, partners and investors, and by the opportunity to strengthen our relationship and collaboration with HPE.” 

HPE’s President and CEO Whitman will join the new company’s Board of Directors, which will further be split equally between nominees of CSC and HPE. “The ‘spin-merger’ of HPE Enterprise Services with CSC is the right next step for HPE and our customers,” she states. “Enterprise Services’ customers will benefit from a stronger, more versatile services business, better able to innovate and adapt to an ever-changing technology landscape. As two companies with global scale, strong balance sheets and a focus on innovation, both HPE and the new company will be well positioned as leaders in their respective markets.”

* CSC split into CSC, which serves commercial and government clients globally, and CSRA, which serves public sector clients in the US.