CSC, HP Enterprise plan to merge to create a tech giant

For months now, there’s been a huge shakeout among companies that provide technology services to corporations, government agencies and large organizations, and the biggest may have come last week, with broad ramifications for businesses in the Washington area.

Tysons Corner, Virginia-based Computer Sciences Corp. announced it is merging with the services business of Hewlett Packard Enterprise Co. out of Plano, Texas, in what executives for the companies said would create the world’s largest pure IT services company with $26 billion of revenue.

The deal would make both companies’ shareholders 50-50 partners in the new goliath, which has yet to be named, and install CSC’s chief executive Mike Lawrie as chairman, president and CEO. Meg Whitman, the head of HP Enterprise, would take a seat on the board.

The agreement comes as the technology services industry has been scrambled by corporate shake-ups, spurred on by the business world’s shift to Internet cloud computing and the arrival of upstarts that can offer similar services for far less cost.

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Dell, for instance, has announced plans to acquire EMC for $67 billion. McLean-based SAIC split itself in two, spinning out a company called Leidos. And CSC and HP Enterprise are themselves the product of earlier corporate maneuvering.

CSC recently split itself in two, forming one company focused on commercial customers and governments globally, and the other serving federal agencies. HP also divided itself, creating one business centered on the enterprise market and one around printers and computer hardware. After the merger, HP Enterprise would be centered on software, servers and a cloud computing platform.

“The industry is consolidating,” Lawrie said in an interview, “and we’re beginning to see that the old conglomerate model in technology is not as much in favor as a much more focused set of technology companies.”

The companies, which have yet to say where the merged company would be based, said they expect reduced costs in the combined entity to the tune of $1 billion, largely by consolidating real estate, data centers and procurement activities.

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Less clear is what might happen to the part of HP Enterprise’s services business focused on the federal business. As part of its decision to split itself in two, CSC agreed not to compete for two years against its former government-facing arm, now called CSRA (after the former CSC spinoff merged with SRA International.)

“HP Enterprise Services has a very strong business in the federal government, and what I’d say is post-close all options, and I underscore the word ‘all options,’ would be on the table,” Lawrie told analysts.

In the meantime, executives said they are excited about the prospects of creating a computer-services giant, serving 5,000 organizations in 70 countries. Lawrie said CSC is an $8 billion IT services company with global strengths in insurance, health care and financial services.

HP Enterprise is an $18 billion IT business that has a strong presence in industries such as transportation, pharmaceuticals, technology, media and telecom. CSC has a cloud computer partnership with Amazon Web Services, and HP Enterprise has one with Microsoft’s Azure offering. ( CEO Jeffrey P. Bezos owns The Washington Post.)

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Lawrie told analysts that the new company would be able to operate “independent of any single hardware provider, establishing the right partnerships for success.”

“The financial engineering side of this (deal) is brilliant,” said Darrin Peller, senior IT services analyst at Barclays. “They’re able to find two entities that have both struggled to ditch areas that have been commoditized and reinvest in digital offerings.

“I think when you put the two together, you get almost the same profile as CSC with a lot more scale. They can do a lot more now for a lot more customers.”

The deal, structured to be tax-free, is valued at $8.5 billion and would give HP Enterprise shareholders a $4.5 billion stake in the new company, a cash dividend of $1.5 billion and the assumption of $2.5 billion of debt and other HP Enterprise liabilities. The transaction is slated to be finalized by the end of March.

“By bringing together the best of these two organizations, we will create a pure-play services leader ready to compete and win against all the current players,” Whitman told analysts. “The new company will have greater agility, focus and the ability to drive faster outcome for our customers.”

Since Lawrie arrived at CSC in 2012, the company has righted its balance sheet after $4 billion in losses caused by a string of troubled contracts. He slashed costs and cut the worldwide head count from 95,000 to 68,000, including halving the workforce in the Washington area.

Since then, the stock price has doubled, and Barclays boosted its earnings-per-share estimates for the coming year after the news of the spinoff.