HPE To Spin Off, Merge Services Business With CSC

by CXOtoday News Desk    May 25, 2016

HPE Image Courtesy www.scientificcomputing.com In a surprise announcement today, Hewlett Packard Enterprise (HPE) is about to embark on a second split.  The company has announced plans for a tax-free spin-off and merger of its Enterprise Services business with CSC. The spin-off and merger is the logical next step in the turnaround of HPE’s Enterprise Services segment. It also allows a standalone HPE to further sharpen its leadership in building the vital end-to-end infrastructure solutions necessary to power the enterprise cloud and mobility revolutions. 

Immediately following the transaction, currently targeted to be completed by March 31, 2017, HPE shareholders will own shares of both HPE and approximately 50 percent of the new company. The transaction is intended to be tax-free to HPE and CSC and their respective shareholders for federal income tax purposes. 

“The ’spin-merger’ of HPE’s Enterprise Services unit with CSC is the right next step for HPE and our customers,” said Meg Whitman, president and chief executive officer of Hewlett Packard Enterprise. “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 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,” said Mike Lawrie, CSC chairman, president and chief executive officer. 

“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. 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 with Hewlett Packard Enterprise”, he added. 

On a pro forma basis, the new company that combines CSC and HPE’s Enterprise Services business is expected to have annual revenues of approximately $26 billion(1), more than 5,000 customers in 70 countries and employees in every major global region. Mike Lawrie, the current head of CSC, will become chairman, president and CEO of the new company, and Meg Whitman will join the Board of Directors. The new company’s board will be split 50/50 between directors nominated by HPE and CSC. CSC’s current CFO, Paul Saleh, will continue in that role in the new company after the transaction closes.

Additionally, Mike Nefkens, the current EVP and GM of HPE’s Enterprise Services business, will be a key part of the new company’s executive team and partner closely with Lawrie on building the new organization. Other executives and directors of the merged company, as well as the name of the company, will be announced at a later date.

The transaction is expected to deliver approximately $8.5 billion to HPE’s shareholders on an after-tax basis. This includes an equity stake in the newly combined company valued at more than $4.5 billion, which represents approximately 50 percent ownership, a cash dividend of $1.5 billion, and the assumption of $2.5 billion of debt and other liabilities. The merger of the two businesses is expected to produce first-year cost synergies of approximately $1 billion post-close, with a run rate of $1.5 billion by the end of year one. There is an opportunity for additional synergies in subsequent years. As owners of approximately 50 percent of the merged company, HPE shareholders will share in the value of the synergies, as well as future growth in earnings. 

One-time costs to separate the Enterprise Services segment from HPE will be offset by lower costs associated with the fiscal 2015 restructuring plan; there are no incremental one-time cash payments beyond those already communicated. The transaction is subject to certain customary closing conditions.

Earlier in 2014, the company had announced to split into two separate companies: Hewlett Packard Enterprise, selling servers and enterprise services, and HP Inc, selling PCs and printers.