HPE Posts Good Quarter, Spins Out Services to Merge With CSC

Hewlett-Packard Enterprise apparently isn’t finished reinventing itself.

As part of its May 24 earnings report—which was the most positive one it’s seen in five years—HPE revealed plans to spin out its enterprise services unit as a separate entity and merge it with IT consultancy Computer Sciences Corp. of San Mateo, California.

The huge IT products and services provider, which itself was one-half the original Hewlett-Packard Co. (the other half being Hewlett-Packard Inc., which sells printers, laptops and desktop PCs) started life as HPE only six months ago. HPE reported adjusted earnings of 42 cents per share on $12.71 billion in sales for its fiscal second quarter.

A poll by Thomson Reuters of Wall Street analysts had projected $12.34 billion in revenue.

The revenue total beat Wall Street expectations, which is not something the company had done since 2011. Profit, however, fell 2 percent from a year earlier, while revenue was basically flat at about 1 percent.

As a result, HPE shares leapt up about 10 percent in after-hours trading May 24.

The merger, which designated the value of HPE’s services business at about $8.5 billion, is expected to be completed by the end of March 2017, the company said. HPE shareholders will own shares of both HPE and the combined company.

CSC chief executive Mike Lawrie will serve as both chairman and CEO of the combined company, and HPE CEO Meg Whitman will become a member of its board of directors.

“Just as we saw a [financial] rebound in HPE Services, it gets spun out and merged with CSC,” Moor Insights & Strategies analyst Patrick Moorhead told eWEEK in a media advisory. “I’m neutral on the CSC deal right now. On one side, it enables HPE to still have a stake in services and that by combining it with CSC, cost basis theoretically will go down.

“CSC is a giant, and my expectation is that their costs are a lot lower. On the other side, it’s important that services that can build out the hybrid cloud remain with HPE. HPE verified with me they will.”

The companies said they expect the agreement to deliver about $8.5 billion to HPE shareholders after taxes—including an equity stake of $4.5 billion in the new company—and a $1.5 billion dividend.