Technically, the deal is a tax-free spinoff of Enterprise Services, followed by a merger with CSC. The resulting IT services behemoth, which would have annual revenues of roughly $26 billion, would be roughly 50 percent owned by HPE and CSC shareholders.
The companies expect to complete the transaction by March 31, 2017.
The news came as a surprise, but then again, Enterprise Services had not been a standout. It represented a big chunk of the nearly 30,000 layoffs that CEO Meg Whitman announced in September, just prior to Hewlett-Packard Co.’s split into two companies. HPE had been aiming to rebuild Enterprise Services’ operating margins to 6 or 7 percent this year and 7 to 9 percent long-term.
Enterprise Services had picked up some momentum, however. One analyst on today’s HPE earnings call noted that the division was likely to deliver $1 billion in net income this year and asked why the company was so willing to give it up.
“We believe this industry will eventually consolidate, and it’s better to be on the front end of a consolidation than on the back end of a consolidation,” Whitman answered. She added that the 50 percent ownership will ensure HPE shareholders won’t be left out if the new CSC becomes a powerhouse of the new IT services era.
You might recall CSC as the company that acquired ServiceMesh in 2013. It’s an old-school IT company, dating back to 1959 and formerly named Computer Sciences Corp. It had an early hand in what we now call software-as-a-service and infrastructure-as-a-service (SaaS and IaaS).
Like Hewlett-Packard Co., CSC recently split into two publicly traded companies, one covering the commercial market (this is the one that’s acquiring the HPE division) and one targeting the public sector.
Separately, HPE announced earnings for its second quarter, which ended April 30.
The company reported revenues of $12.7 billion and net income of $320 million, or 18 cents per share.
For the same quarter last year, HPE reported revenues of $12.5 billion and net income of $305 million, or 16 cents per share.
Non-GAAP earnings of 42 cents per share matched the consensus analyst estimate called by Thomson Financial.
At press time, HPE shares were trading at $17.95 after-hours. HPE had ended the trading day up roughly 1 percent, at $16.25.