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By Nick Wakeman

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Nick Wakeman

CSC-HPE questions yet to be answered

The mega deal between Computer Sciences Corp. and HP Enterprise is complex so there are plenty of things that will remain unknown.

The biggest question for me, of course, is what happens to the public sector business that will come with the merging of HPE's IT services business with CSC.

Mike Lawrie, chairman, president and CEO, of CSC told analyst that all options will be considered, but not until after the deal closes in March 2017.

He didn’t list the options, but there really are only three: keep it, sell it to another company or spin it out.

Of the three, a spin-out – where the HPE public sector IT services business operates as independent company – is probably the least likely, especially in the near term after the deal closes. It would take some time to build the infrastructure – human resources, payroll, accounting, etc. – for it to be successful as an independent entity.

Other companies that have gone this route spend a year or more making the investments necessary for an independent run.

So, will CSC keep the federal business? Probably not. After all, they just shed the public sector business they had and while they aren’t picking back up another $5 billion public sector business, they are getting nearly $3 billion.

A business that large will need high level time and attention and that was the complaint about CSC’s old public sector business. It was a management and resource distraction that limited CSC’s ability to focus on faster growing and higher margin commercial work.

This leads me to believe that a sale of the business is the most likely. It just makes the most sense.

And CSRA – the company CSC created when it combined its public sector business with SRA International – is the most likely buyer in my mind.

They didn’t address the question when I asked them today. They released a nice statement:

“We congratulate our former colleagues at CSC on the announcement and wish them well. As an independent public company, CSRA will continue to operate as a pure-play provider of next-generation IT solutions to the U.S. federal government, always keeping the best interests of our customers and shareholders in mind.”

They also didn’t address my question of whether they felt betrayed that CSC spun them out and months later are acquiring a significant public sector business.

I’m sure there will be other potential buyers, but I give CSRA the inside track in part because Lawrie is the chairman of CSC and CSRA. He would know best how the two companies could fit together.

Of course, he might advise that the fit isn’t right. Perhaps there will be too much overlap and not enough synergies.

And talking about synergies, the companies say they expected $1 billion in synergies in year one and possibly $1.2 billion ongoing. Those are big numbers. One analyst predicts 65,000 jobs will be cut. Where will those cuts come? Will CSC's headquarters remain in Northern Virginia?

But with the long lead time between now and the deal closing, I don’t expect the answers to these questions to come any time soon.

Posted by Nick Wakeman on May 25, 2016 at 10:37 AM


Reader Comments

Fri, Jun 3, 2016 Tom

Nick, playing into the decision of CSC/HPE to shed or keep the public sector piece is that CSC and CSRA have a non-compete clause that states CSC can't pursue federal work for 2 years. BUT, I believe, and this is where I'd like you're input, there is some sort of clause that states if the work acquired is less than 20% of overall share, that the non-compete does not apply. Being that the fed work would be an estimated 11%, is this option on the table and somehow more viable than the speculation that it gets spun off soon after close?

Tue, May 31, 2016

aa

Thu, May 26, 2016 Joe Mazzafro CSRA

Nick debt is something little as been said about re CSC/HPE Services. I think you are right that CSRA is the logical buyer for this new CSC government services business but CSRA's debt loading from its spin out and acquisition is hurdle to this happening Also I would like to know how much debt CSC is taking on with this acquisition of HPE Services

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