HP Enterprise to Spin Off, Merge Services Business – Wall Street Journal

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Hewlett Packard Enterprise is the former H-P business that focuses on corporate technology customers.


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Hewlett Packard Enterprise is the former H-P business that focuses on corporate technology customers.


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Bloomberg News

By

Don Clark and

Tess Stynes

Updated May 24, 2016 7:04 p.m. ET

Hewlett Packard Enterprise Co. said it would spin off most of its technology services operations and merge them with those of Computer Sciences Corp., the company’s latest adjustment to a shifting landscape that is roiling the market for corporate technology. HP Enterprise will shed a business that accounts about 100,000 employees, or close to half of the Silicon Valley giant’s workforce.

The deal, a blockbuster follow-up to the breakup of Hewlett-Packard Co. last fall, will create a corporate technology services specialist that will be led by Computer Sciences executives and have about $26 billion in annual revenue, the companies said. The remaining HP Enterprise operations will concentrate mainly on software, server systems, networking and storage hardware.

HP Enterprise said the transaction should be worth about $8.5 billion to its shareholders. That estimate includes a 50% stake in the new company created with Computer Sciences, valued at about $4.5 billion, as well as a cash dividend of $1.5 billion and the assumption of about $2.5 billion of debts and liabilities.

The move is evidence of ongoing turmoil in the corporate computing market as corporate spending tightens and traditional data centers give way to cloud computing. Hewlett Packard Enterprise faces increasing competition from cloud computing vendors including Amazon.com Inc. and Microsoft Corp., that sell metered access to raw computing power over the Internet. Customers must decide whether to opt for cloud services, maintain conventional data centers, or build their own private cloudlike facilities—a business especially targeted by HP Enterprise. The combined spinoff and merger, which will focus HP Enterprise more tightly on hardware sales, represents Chief Executive Meg Whitman’s doubling down on a breakup approach to a shifting technology landscape, in contrast to the merger strategy taken by Dell Inc. and EMC Inc.

“We are creating two great companies that are going to be more focused on a narrower set of businesses,” Ms. Whitman said in an interview.

Operations affected by the deal include technology outsourcing and other businesses that were part of Hewlett-Packard’s purchase of Electronic Data Systems in 2008 for $13.9 billion.

The two companies announced the transaction along with quarterly financial results. HP Enterprise posted a better-than-expected 1.3% increase in revenue, while Computer Sciences said revenue fell 5.4% to $1.8 billion.

Shares of HP Enterprises, which announced the transaction along with its second fiscal quarter results, rose more than 10% in after-hours trading. Computer Sciences shares rose 20%.

Ms. Whitman, who pushed for the creation of her current company through the H-P breakup, called the deal a “game-changing” transaction. The service businesses being divested account for about 40% of HP Enterprise’s revenue, though were growing more slowly with lower profit margins than its other businesses, she said.

“I believe that services industries will consolidate over time, and better to be at the forefront of that consolidation rather than at the end,” she said.

The company long known as Hewlett-Packard developed a reputation for landmark acquisitions, including the EDS takeover and the $25 billion deal for computer maker Compaq Computer Corp. in 2001. Ms. Whitman, who became CEO in 2011, has been steadily undoing the prior growth strategy through moves that include last year’s creation of HP Enterprise and HP Inc., the separate entity that now sells PCs and printers.

Computer Sciences, in its current form, is also the result of a spinoff. The big services company, based in Falls Church, Va., in November completed the separation of its fast-growing government business into a new company called CSRA. That business was merged with SRA International Inc.

The company, after absorbing the former HP Enterprise operations, will be led by Mike Lawrie, Computer Sciences’ chairman, president and chief executive. Ms. Whitman will join the new company’s board, which will have an equal amount of nominees from both companies. The company is expected to take a new name, which hasn’t been determined, Ms. Whitman said.

The deal “is a significant and logical next step forward for both companies in their transformation journeys,” Mr. Lawrie said during a conference call.

HP Enterprise and Computer Sciences said the deal would be tax-free to shareholders. The companies also projected the combination would generate roughly $1 billion in cost savings following the deal’s closing, which they expect by next April.

“This is a good marriage,” said Crawford Del Prete, an analyst with International Data Corp., creating a potent services company while extending Ms. Whitman’s strategy of making HP Enterprise more nimble and profitable. “Meg is all about focus.”

HP Enterprise has already trimmed head count in its services operations, Mr. Del Prete said. The venture with Computer Sciences will compete with services giants such as International Business Machines Corp. and Infosys Ltd. HP Enterprise will retain some services operations, including those related to provide technical support for its software and hardware products, Ms. Whitman said.

Ms. Whitman had moved to shed or reduce investments in other businesses, recently completing the roughly $2.3 billion divestiture of its majority stake in China operations that sell networking gear, servers and storage hardware. In April, HP Enterprise unveiled plans to sell its majority stake in Indian outsourcing firm Mphasis Ltd. for about $825 million to Blackstone Group LP.

HP Enterprise, like others that sell products to corporate customers, has been hurt by lackluster demand, currency exchange issues and other headwinds. But the company showed progress in the latest quarter, which Ms. Whitman characterized as “very strong.”

The company reported that server revenue rose 7% in the latest quarter and improved 10% excluding currency effects. Networking equipment sales increased 57%.

In all, HP Enterprise said net income in the quarter ended April 30 rose 5% to $320 million, or 18 cents a share, compared with profit in the year-earlier period of $305 million, or 16 cents a share. Excluding restructuring-related expenses, costs related to its separation and other items, adjusted per-share earnings fell to 42 cents from 43 cents.

The company had projected adjusted per-share earnings of 39 cents to 43 cents.

Revenue rose 1.3% to $12.71 billion, above analysts’ expectations of $12.33 billion. Excluding foreign-exchange rates, revenue grew 5%.

HP Enterprise also affirmed its fiscal year outlook.

—Maria Armental contributed to this article.

Write to Don Clark at don.clark@wsj.com and Tess Stynes at tess.stynes@wsj.com

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