Hewlett Packard Enterprise said it would spin off and merge its struggling IT services business with Computer Sciences Corp, allowing the company to focus on its faster growing businesses. 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.
Paul Saleh, CFO of Computer Sciences will continue in that role in the new company after the transaction closes. The unexpected news sent HPE shares soaring 11%, to $18.05, in extended trading. The PC and printer company is now separate from the enterprise company. The $8.5 billion deal is expected to be tax-free and involves spinning off the Enterprise Services division to the company. The enterprise services segment represented about 37% of HP Enterprise's total revenue for the quarter.
"HPE will also be more free to partner surgically with other services providers, which could be interesting" he said, pointing to areas such as managed security. CSC will also transfer $1.5bn in cash to HPE. Its shareholders will receive an nearly 50% stake, valued at more than $4.5 billion, in the new company.
Tysons, Virginia-based CSC is subject to a two-year non-compete agreement in the federal government field with CSRA (NYSE: CSRA), the Falls Church-headquartered government technology services contractor formed in November 2015 through the spinoff of CSC's us public sector business and subsequent merger with SRA International.
On the other hand, Raymond James revised down its rating on CSC stock from Outperform to Market Perform, and said that its previous Outperform rating thesis noted Computer Sciences' low-priced valuations, a $7-billion business that had the potential to mix with a higher-margin one, and the fact that it was an attractive acquisition target. That business was merged with SRA International Inc. The remaining HPE will resume selling network, servers, and storage gear. The revenue beat came on the back of the Enterprise Group reporting revenue of $7.01 billion, beating the Street's estimate of $6.67 billion while the Enterprise Services earned $4.72 billion, surpassing the consensus expectations of $4.61 billion. Networking equipment sales increased 57%. In fiscal 2013, three customers accounted for 65 percent of services revenue.
The deal comes with HPE, Palo Alto, Calif., in the midst of a plan to cut 30,000 HPE services jobs as it takes $2.7 billion in costs out of the business.
CSC recently completed the acquisition of Xchanging.
Analysts polled by Thomson Reuters expected the company to report earnings of $0.42 per share and revenues of $12.33 billion for the second-quarter.
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