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.
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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.