CSC-HPE make deal to merge IT services businesses

Just when you thought they were out, they come storming back.

Computer Sciences Corp., just six months removed from shedding its public sector business in a complex deal to spin-off its government business and merge it with SRA International, is entering into another complex transaction with HPE to merge with that company’s services business.

And yes, it includes about $2.8 billion in public sector business such as the Navy’s $3.5 billion Next Generation Enterprise Network. The deal also means that HPE is shedding the old EDS business it acquired in 2008, which brought with it the precursor to NGEN, the NMCI contract.

For sure, the public sector business didn’t drive this mega deal, which creates a $26 billion company. Of that total, $8 billion comes from CSC and $18 billion from HPE.

According to an HPE infographic, 11 percent of the $26 billion is government work.

HPE President and CEO Meg Whitman called the deal a “spin-merger” and she might be right. Though it does seem to me more like HPE is buying CSC and spinning out a new entity.

When the deal closes next March, HPE shareholders will hold about half of the shares in the new CSC. Mike Lawrie will remain chairman, president and CEO of the new company but Whitman will join the board of directors and board members will be split between nominees of HPE and CSC.

HPE shareholders will received a cash dividend of $1.5 billion along with an equity stake in the new company valued at $4.5 billion. The deal also includes the assumption of $2.5 billion in debt and other liabilities related to HPE Enterprise Services. That brings the total value of the deal to $8.5 billion. It is structured to be tax free.

Shedding the IT services business will allow HPE to focus on five key business areas: services, storage, cloud infrastructure, networking and converged systems. HPE will still have about $33 billion in annual revenue and some of that will be in the government market as it relates to those key business areas.

But the public sector IT services business led by Marilyn Crouther will be part of the new CSC.

In announcing the deal, both companies talked about transformation and that his was the next logical step for both. Time will tell. They claim they will have $1 billion in synergies in year one. That’s a lot of cutting.

The new company will be focused on cloud, mobility, application development and modernization, business process services, big data and analytics, workplace, IT services and security.

Despite its 11 percent stake, public sector was among the “priority” industries for the new company. They listed insurance, healthcare, transportation, the pharmaceutical industry and financial services.

I’ve asked HPE and CSC whether, the new CSC will also look to shed the government business that it is acquiring but I’ve been told it is too soon to speculate.

I won’t venture a guess at this stage but others should feel free to speculate. The merger process will be about 10 months so we’ll be watching how this plays out.