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By Nick Wakeman

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Nick Wakeman

CSC plans to split in two

After months of rumor and speculation, Computer Sciences Corp. has announced that it will separate its government and commercial businesses into two separate companies.

The split should become effective by the end of October, the company said in an announcement. As part of the split, the company will pay a special cash dividend of $10.50 a share.

“CSC begam its turnaround three years ago,” said CEO Mike Lawrie in a statement. “That turnaround has progressed strongly and our focus now turns to positioning the business for long-term growth and leadership.”

A split is the best way to accelerate the company’s transformation, he said.

Many details remain to be finalized but Lawrie will remain CEO of the commercial company and will be executive chairman of the public sector business. Both companies will be publicly traded and CSC shareholders will have stock in both companies.

The announcement of the split came as the company reported results for its fiscal 2015, which ended  April 3. Revenue was down 6.3 percent, falling to $12.2 billion from $13 billion a year earlier. Revenue for the public sector business was virtually flat with a 1 percent drop, hitting $4.057 billion in 2015, compared to $4.099 billion in 2014.

The public sector business employs 14,000 people. The commercial side of the house is much larger with $8.1 billion in revenue and 51,000 employees.

CSC path to a split began several years ago as it struggled with debt, performance issues and a weak revenue picture. Profits were under severe pressure as the company struggled as the market shifted toward more of a “as a service” model.

Lawrie became CEO in March 2012 and immediately kicked off a turnaround effort. The turnaround effort included divestitures, layoffs, a flattening of the organization and new leaders for several divisions. Along the way, there also was a focus of salvaging several projects that had run into trouble. Most notable of these was a United Kingdom contract with the National Health Service contract, originally worth $3.7 billion.

CSC’s divestitures included a $1 billion sale of its credit services unit to Equifax. It also sold several other smaller unites that provided consulting services, value-added reselling and an IT staffing unit.

The moves Lawrie instituted helped the company’s financial performance and stabilized what was a shaky ship, but about a year ago there was a growing sense that the restructurings and divestitures had reached their limits. Growth was still very hard to come by as evidenced by the 2015 results.

Splitting its government and commercial businesses began to seem almost inevitable given how different the two markets operate and how few companies are successful with both significant footprints in both sectors. Among the actions CSC is rumored to have considered included an outright sale of the entire company and a sale of the public sector business to a private equity group.

As CSC works toward a split it has plenty of examples to look at for what to do and what not to do. Splits have become quite fashionable in the market. The original Science Applications International Corp. split into SAIC and Leidos; Exelis split off Vectrus; Engility was spun out of L-3 Communications; and PAE was divested from Lockheed Martin, to name some of the larger transactions.

The big difference, of course, is that all of these examples are companies that were splitting off other government-focused businesses. CSC’s split is creating a pure-play government business and a pure-play commercial one. It isn’t creating a potential rival.

One of its largest shareholders, JANA, issued a statement supporting the split, “which we think positions both businesses for success and will unlock significant shareholder value.”

The split doesn’t require a vote by the shareholders but will have to undergo customary conditions include a determination of the tax-free nature of the transaction and filings with the Securities and Exchange Commission.

Posted by Nick Wakeman on May 19, 2015 at 9:46 AM


Reader Comments

Mon, Jun 1, 2015

This is a very accurate assessment of the true story: http://www.forbes.com/sites/adamhartung/2015/05/31/csc-when-all-else-fails-split/2/

Fri, May 22, 2015

There's passing reference in this article to "performance issues" as a spur to the split. Perhaps an understatement. Company had problems that were massive beginning with the IRS systems upgrade around 20 years ago, which dogs the government and taxpayers persistently still. As a matter of fact, most large SI jobs and programming jobs are failures in at least two of the Big Three--cost, sched, delivered on the spec. Sure, half the company might be snapped up, but quite possibly at firesale prices. The people shift, the execs who oversaw disasters are mostly gone from such companies within a few years, and little residual value of client relationships remains in such a company for customers or shareholders to benefit from. It is hard to see what one buys when one acquires a company like this. Best guess consensus is a price of .38 x revenue.

Wed, May 20, 2015

If you split a pile of horse manure into two pieces, are the two pieces still considered manure?

Wed, May 20, 2015

There is no 'turnaround' here. This is called failure.

Wed, May 20, 2015

The ink won't be dry on the split and somebody will buy the CSC government business

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