Friday, 29 May 2015

Nemesis in the guise of the SEC stirs

The New York Times has reported that the SEC settlement with CSC relating to its accounting irregularities may be voided due to disagreements within the SEC.

Details on:

The article says that the SEC officials who are opposing the settlement may withdraw their disagreement in return for proceedings being brought against a former Controller of the company. This Financial Controller is not named. I may be wrong, wasn't Donald G DeBuck CSC's Corporate Controller at the time of the accounting irregularities?

Whoever the Controller involved is, it seems incredible that there could be SEC proceedings against him or her while the CEO and CFO at the time, Michael Laphen and Michael Mancuso escape punishment. What happened to the concept that "the buck stops at the top"??

Whatever; I cannot imagine Mike Lawrie is too pleased by the prospect of this SEC investigation reopening. 

Wednesday, 20 May 2015

“Smoke gets in your eyes” or CSC Q4 FY2015 earnings

CSC announced its Q4 FY2015 earnings and held its Analyst Conference Call on May 19, a week later than in previous years. 

We had wondered why the delay, and found out yesterday, as the earnings announcement itself was overshadowed by the other news Mike Lawrie had for us. 

This posting looks solely at Q4 FY2015 earningsAnd it was “back to the future” once again with earnings beating Wall Street profit expectations (after adjusting for this unusual item and that one-off impact), allied to accelerating revenue declines.   

Non-GAAP earnings per share, excluding exceptional items, one-offs and the like, came in at $1.26, compared with Wall Street consensus of $1.20 and actual earnings of  $1.16 for Q4 FY14.   Without the unusual and/or one-time itemsEPS for the quarter was only $0.06.  

Back in the latter days of Mike Laphen’s tenure as CEO, as the quality of CSC’s profits deteriorated, we saw earnings announcements with more and more reconciliations and explanations of  “adjusting for this unusual  item and that one-off impact”.  Are we heading in that direction again? 

There was nothing remarkable about the Q4 FY2015 earnings announcement, just a worrying set of numbers. Profits are maintained by continued cutting of costs and laying-off more and more skilled technical staff.  

Revenue for Q4 FY2015 was a different story. While the US Public Sector remained almost flat with Q4 FY2014, the commercial revenue decline is accelerating, being 17% down on Q4 FY2014 in constant currency.  Neither of the two segments of commercial revenue (Global Business Solutions and Global Infrastructure Services) achieved $1 billion revenue for the quarter.    

The operating margins of Business Solutions for Q4 FY2015 were satisfactory at 13.5%,  while Infrastructure Services showed an operating loss of just over 5% for the quarter.   Mike Lawrie’s  explanation of the reasons for this loss (“price-downs, restructurings and contract completions”) is plausible but not comforting for the future. These underlying issues have been heading in CSC’s direction for quite some time and will not just go away. It is hard to see how things will improve substantially unless Mike Lawrie’s optimism about the positive impact of next generation offerings turns out to be well-founded (for once?). 

Lastly, new business bookings for Q4 FY2015 were anaemic at $3.4billion, down a massive 20% on Q4 FY2014

Thus it looks like CSC can only maintain profitability by cutting loose old loss making accounts, which many would see as sensible. However, the problem is CSC does not appear to be able to turn badly performing accounts or services into profitable ones - it just gives up on them - or indeed sell new profitable services. Anyone can slash and burn and leave the wounded to the wolves. It takes imagination to create and grow something. We see nothing about the results or announcements of yet more lay offs that will change that view.

Cutting through the smoke and one-offs,  our major “take away” from the earnings announcement is heightened concern about the continuing, indeed accelerating, revenue declines.  

prepared by Littlejohn

CSC To Be Split in two; plus addendum Mike Lawrie’s two hats; are they a problem?

CSC to split into two publicly quoted corporations and declares a special dividend of $10.50 per share

After a couple of weeks of speculation and rumor, CSC  announced its plans to split into 2 distinct quoted companies,  being its Global Commercial business (including non-US government) and its US Public Sector business, with a target implementation  date of October 2015. CSC also announced a special dividend of $10.50 per share.

We believe these announcements are linked and are both in support of a plan to sell off CSC. We also believe these plans address two major difficulties CSC has to overcome to achieve a sale at an acceptable price.

The first difficulty is share valuation.  The current share price is just over $69, with a market capitalization of almost $10billion.  We guess CSC shareholders would be looking for a price at $75 or above to sell.  In our opinion, this is unrealistic today. The business fundamentals do not warrant and will not warrant such a price unless, or until, there is some real revenue growth. 

The special dividend of $10.50 would take the share price down below $60, and reduce the market capitalization by some $1.4 billion, making CSC more “affordable” to an acquirer while keeping the current shareholders happy.

Right now, we do not have many specifics on the details of the split, other than the fact that Mike Lawrie will combine the roles of CEO of Global Commercial and Executive Chairman of US Public Sector, that the 2 companies will act at arms-length from each other, but will have technology cross-licencing agreements to enable each to use the full breadth of current (and planned) CSC technology, intellectual property and the like.

Mike Lawrie said the split has the written support of major and activist shareholder Jana, whose philosophy and track record in this area gives some clues about what is happening.

The reasons given for the split in the Analyst Conference and the employee communication were the usual Corporate-Speak about greater client benefit, unlocking shareholder value, next step on the road to ultimate success and so on.  Interestingly these are the very same reasons that were given by previous CSC CEOs as the compelling logic for keeping CSC together as one company!

We suggest readers ignore all this Corporate-Speak;  like the special dividend of $10.50 per share which is there to reward share holders only. Note that no such sum is put aside for investment!!!!!. A split into two companies is a pragmatic and sensible step in CSC’s program of financial restructuring aimed at making the company more attractive to potential acquirers.

Over the past several months, CSC has already made several moves to manage out financial risks and uncertainties in order to make itself more attractive to a potential buyer, including:

·      Settling the Class Action lawsuit alleging CSC willfully misled investors  about the true state of the company’s finances
·      Closed out the financial risks on the troubled UK NHS project
·      Settled the SEC investigation into its financial irregularities
·      Bought out employee pension annuity commitments, replacing unquantifiable open-ended financial commitments with a fixed and measurable liability.

So why split CSC into two now?

About 10 years ago, it was reported that CSC was trying to sell  itself to potential buyers including Private Equity Houses, major US Government Contractors, global IT companies, and a large  Indian IT house. As we know, CSC was not sold. It was rumored that a major stumbling block, maybe the major stumbling block, was the inability to find a single buyer who not only wanted the whole of the CSC business but one who could get the US Government approval, and security clearances to successfully take over US Public Sector. Simultaneously selling two “halves” of one CSC to two buyers without a clear prior definition of each of the two “halves” is just about impossible .

We believe that CSC may have again been unable to find any one buyer for the whole business.  This is not surprising, as very few, if any, companies enjoy the same level of presence as CSC in both the global commercial and in the US Government markets.  Splitting the company now, and quickly, into two saleable segments, well-defined with known interdependencies and possibly friction points, will allow CSC to more effectively target potential acquirers and allow it to sell either segment without (too much??) prejudice to prospects of selling the other.

There are many difficult  “details” to be worked through, particularly in the areas of product and service development, engineering, top-level support, technology ownership etc. Also not to under estimated is the difficulty of unraveling the cross charges between Commercial and Public services for shared facilities, services, and overheads.

CSC has a long history of little cooperation between its business units when it comes to inter-business unit work and profit sharing. But splitting the companies now will enable CSC to identify and address all these issues before they are round the table discussing terms with a potential buyer.

Our bottom line; this is a good plan for CSC. Now it needs very good implementation.

Mike Lawrie’s two hats; are they a problem?

There has been quite a bit of comment, mostly skeptical or negative, about the fact that Mike Lawrie will have two distinct jobs after the split of CSC . He will be CEO of Global Commercial and Executive Chairman of the US Public Sector, both of which will be publicly quoted companies.

We shall leave aside the question of how he will find time to do both jobs; this is a question of management style, delegation philosophy and prioritization.

But it is a very poor Corporate governance.

The close ties and interdependencies between the 2  spin offs from CSC can lead to potential conflicts of interest between the two CEO roles.  Additionally,  CSC should be acutely aware of the dangers of concentrating the powers of Chief Executive and of Chairman into one person . The company was almost destroyed just a few years ago by a failing executive who simultaneously held both CEO positions.

As explained in yesterday’s blog on the Split of CSC, we are convinced that the company split is the  precursor of a sale (or two sales)  in a relatively short time frame.  For that reason , having Mike Lawrie  as CEO of both companies  is powerful pragmatism.

CSC must get a clean split between the two new entities that works to the satisfaction of both parties with interlinks and hand-offs that work too. It cannot afford to have a “Powerpoint solution”  which looks great from the Chief Executive suite but does not work at ground-level as has been the case with CSC Operating Models for the past 10+ years for example. 

For that reason, an insider who knows both sectors is a necessity in each of the two  CEO roles. Having Lawrie in both CEO positions gives both sectors equal weight in the discussions and a forum to reach binding and sensible agreements quickly……and allows the single CEO to bang a few heads on both sides if need be.  Putting Lawrie in charge of one sector and promoting an insider to CEO of the other sector would not create the balance needed between the two, as the newly promoted CEO would not have the same stature as Lawrie and would not be able to deal with him on an equal footing.

In our opinion, Mike Lawrie’s background and experience is more suited to the Global Commercial Sector in the longer run. So one could hire a CEO from outside for US Public at the time of the split.  This is not realistic if the short term objective is to sell it. The acquirer would likely either want to integrate US Public Sector into its own existing operation; or would want to appoint one of its own trusted senior executives into the CEO job. Either way, the tenure of a CSC nominee as CEO of US Public Sector could be very short indeed. What could motivate a top class outside executive to take such a position? Either nothing at all or a truly massive payoff after acquisition, which in itself could deter a potential buyer as the deposed CEO could collect his multi-millions and go straight to a competitor.

If the split is done cleanly and the price is reasonable, the US Public Sector could be acquired quickly. It is well bounded, has relatively few internal challenges and most of the likely acquirer candidates are identifiable and well-known , being in the US Public Sector Market.  So the position of the first CEO of US Public Sector  could be very short lived indeed.

Lastly, it is likely that any potential buyer of either of the two Sectors will ask for some changes in the agreements covering the joint activities of both Sectors of CSC,  whether it be in technology, engineering, product and service development, top level support or simply facilities and back office support. Typically when such issues arise during acquisition discussions they need to be settled quickly or can end up jeopardizing the whole deal. Having Mike Lawrie as CEO of both companies will ensure such topics would get immediate attention in the “other” ex-CSC sector , who otherwise may not be motivated to give it a high priority.

In conclusion, Lawrie’s two hats is poor Corporate Governance. It will require the non-executive directors of both quoted companies to be particularly vigilant in their oversight.  But given the links between the two companies and the task in hand, our belief that the situation will last a short time only, thus it is the most sensible pragmatic solution.

Earlier comments:-----------------

This message was sent to you by the CSC Corporate eBroadcasting Manager as part of a larger distribution.

Earlier today we announced our plan to separate CSC into two publicly-held, pure-play companies: one to serve commercial and government clients globally and one to serve U.S. public sector clients. This is a significant milestone – creating two world-class businesses, each with the ability to help lead their clients in their respective digital transformations.

Today’s announcement comes at an important inflection point. In the “Get Fit” phase of our turnaround, we achieved significant results. We implemented a common operating model, streamlined our cost structure, strengthened our leadership team, and formed strategic partnerships to lead in next-gen IT. At the same time, the markets we serve have been evolving rapidly. Today, commercial clients are looking for agile providers with a deep understanding of their business that can help lead their digital transformations. In the U.S. public sector, clients want providers with deep experience in government-focused innovation, along with delivery excellence.

Our journey to growth will be enhanced by the ability of our global commercial and public sector and U.S. public sector businesses to operate independently as pure plays focused on their unique market opportunities. Separating the two businesses positions us well to accelerate the “Grow” and “Lead” phases of our transformation, and deliver greater value to our clients, employees and shareholders. While the two companies will operate independently, they will have a unique partnership, collaborating on intellectual property and next-gen solutions. View the video for more on the rationale for change.

How will this impact you? Based on your current role in the organization, you will join one of two strong and focused companies that are primed to succeed. Both companies will offer more focused career platforms with exciting opportunities to grow.
CSC – Global Commercial will be a growth-oriented company that succeeds through industry-specific intellectual property, go-to-market agility, innovation and delivery excellence; this $8.1 billion business will include 51,000 employees serving more than 1,000 commercial and government clients globally, including 175 of the Fortune 500.
CSC – U.S. Public Sector will be a top-three leader serving the U.S. public sector with its scale, reputation, government-ready innovation and delivery excellence; this $4.1 billion business will include 14,000 employees serving U.S. federal, state and defense agencies.

The separation is expected to occur by October of this year, subject to regulatory review and approvals. In the meantime, it is business as usual for all CSC employees. We will provide proactive and regular updates throughout the separation process. Access C3 for frequently asked questions, updates, and to post your questions.

Thank you for your dedication to our clients, and the passion and focus you bring to leading their transformations and delivering on their missions. Let’s work together to launch these businesses with the momentum that has successfully carried us through our turnaround.

- Mike  

  1. I am sure the owners of Cassandra will soon make a special post about it, hopefully providing more quality analysis than past posts: CSC splits into NPS and Commercial. May be step 2 in getting one of them ready for a take over by investors or the competition. FY15. GBS down. GIS down. Total revenue down by -6% to 12.1 M. OI down about 300 k as well.
  2. No it wasn't a lie, as rumoured, CSC are splitting into two separate companies, details in the link below. Although it doesn't mention anything about a potentional take over or sell off at this stage

    Anonymous has left a new comment on your post "Exodus - Movement of the people": 

    Somebody drag out that Mikey quote from when he joined - he told us that he wasn't going to break CSC up or sell it off. I'm sure it was in an email.... would make a nice story for Cassandra :)

    I can't find it at the moment...

    Meanwhile can somebody cleverer than me explain how having two companies makes any sense - given that both operated separately for regulatory and security reasons in the first place and also have been reported separately in the figures for as long as I can remember....

    He also said that the two companies would share IP and technology - much like today no?

    The only possible way this makes any sense is if this is a precursor to a sell off of one or both - which will happen after October by the looks of things.

    BTW the $10.5 per shre extra "split up" dividend that will be paid will cost $1.5 billion - from a company with falling income, large debts, a $300 million "employee restructuring program" and who has already had a pay day loan of the entire income from NPS for FY16.

    That's all of the money spent, every last cent by my reckoning.



    I'm starting to hope I'm on the "be replaced by an apprentice from the third world" list.