Less than a year after a landmark split halved Hewlett Packard into two $50 billion companies, the software half is at it again.
Hewlett Packard Enterprise, run by Meg Whitman, on Tuesday said it was spinning off its enterprise services business, and merging it with Computer Sciences Corp., to create an IT services firm with $26 billion in annual sales. The unexpected news sent HPE shares soaring 11%, to $18.05, in extended trading. CSC shares rocketed 20%, to $42.
The deal for the new entity, which Whitman jokingly called CSCES, is expected to close in March 2017. CSC is a major provider of services to the U.S. government. News of the spin-off came while HPE released its financial results at the close of markets Tuesday.
The “spin merger,” as HPE CEO Whitman calls it, “unlocks value” for HPE and its shareholders, she said. HPE and CSC had been talking for three months about such an arrangement to create two new companies: The as-yet unnamed entity and a more “laser-focused” HPE.
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“We knew each other well after separation, and saw the clear benefits” of a move, Whitman told USA TODAY in a phone interview.
The slimmer, post-split HPE, with expected annual sales of $33 billion, should grow faster and at higher margins without its Enterprise Services unit, analysts said.
It’s part of an industry shift that reflects the rapid ascent of cloud computing in the business services market.
“When it comes to IT services, it’s about having coverage and global mass,” Jim McGregor said, principal analyst Tirias Research. “The bigger you are, the more resources you have, the more likely you are to win major contracts, especially with the government.”
With the acquisition of EMC by Dell, it’s clear that today “it’s all about bulking up to be a major, worldwide supplier,” said McGregor.
In a conference call with analysts earlier, Whitman said the timing was right for a collaboration with CSC. “We believe the industry will consolidate, and it was better to be on the front end of that consolidation,” she said.
“We have this thing to a science,” Whitman said on the call.
Investors in HPE will own 50% of the new company, which will be run by Lawrie. Whitman will join the board, which will be split 50 50 between directors nominated by HPE and CSC.
HPE, meanwhile, registered a fiscal quarter in line with what analysts expected, its second since it spun off from HP on Nov. 1. HPE shares are up 12% since the historic split.
The independent company reported non GAAP second-quarter profit of 42 cents per share on $12.7 billion in sales. Analysts polled by S&P Global Market Intelligence expected a profit of 42 cents on sales of $12.35 billion.
Enterprise services, a segment of the business that endured heavy cuts as part of the company split, has been the best barometer of HPE’s progress and success rate, said Crawford Del Prete, chief research officer at market researcher IDC.
Sales for that services group , which will be splintered off, slid 2% during the recently-completed quarter to $4.7 billion. It posted an operating margin of 6.7%. Sales from its enterprise group, a division which will stay with HPE, rose 7% to $7 billion, with an operating margin of 11.7%.
But, bottom line, HPE needs to “show revenue growth,” Del Prete said. Overall sales rose 1% in the most recent quarter.
COMPETITIVE PRESSURE
The spin merger indicates HPE will concentrate more deeply on helping corporate customers transform to cloud based services, and protect its business in security- and data driven-related services, says Tom Bittman, an analyst at market researcher Gartner.
It should offer substantial scale for HPE and CSC to compete worldwide. “The way that the enterprise services market is going, I’m glad they’re doing this,” tech analyst Patrick Moorhead said. “The kind of services they are letting go are helped through scale.”
Moorhead added Whitman has HPE headed in the right direction: Its first quarter financial performance marked an improvement in every business segment for the first time since the fourth quarter of 2010. “Synergy is absolutely spot on,” he said.
HP Inc., the PC and printer company also created during the historic split of the original HP last year, is scheduled to report its quarterly results on Wednesday.
Date: May 25, 2016