Tuesday, 31 May 2016

CSC to merge with Hewlett Packard Enterprise


We apologise for the delay in preparing this post but we were analysing the new high powered HPE/CSC Engine, see image below, and had some trouble understanding its workings. Apparently the guy with the butterfly net represents the sales force catching opportunities.


The announcement of CSC’s Q4 FY16 results were overshadowed by the announcement of the company’s merger with the Enterprise Services segment of Hewlett Packard Enterprise. 
Here are the headlines from the CSC news release:
• CSC and the Enterprise Services segment of Hewlett Packard Enterprise (HPE) to create leading pure-play global IT services company, uniquely positioned to lead clients on their digital transformations;
• New company expected to have annual revenues of $26 billion and more than 5,000 clients in 70 countries, covering every major global region;
• Combined company expected to produce first-year synergies of approximately $1 billion post-close, with a run rate of $1.5 billion by the end of year one;
• CSC and HPE shareholders each will own approximately 50 percent of shares in the new company;
• Agreements between HPE and the new company to ensure ongoing beneficial relationship; and
• Mike Lawrie to become chairman, president and CEO of combined company; Meg Whitman to join the new company’s board; board appointments will be split equally between nominees of HPE and CSC.

How much of a surprise is this? Not as much as it would have been three or four years ago! Neither HPE nor CSC are the powerhouses they used to be, and it was difficult to see how either of them was going to turn things around as more agile and focused competitors overtook them.

The news releases about the merger refer to growth, benefits for customers, world-class capabilities, technology leadership , innovation and so on. However, neither company has a stellar record in getting real value out of its acquisitions; does anybody remember what happened to EDS, which is what HP Enterprise Services is based upon? We think this is HP ditching services so that it can focus on widgets - the stuff on which the company was built. This merger is going to be tricky for the new company to keep the best talent from both sides of the house.

We shall wait and see how the merger planning plays out, but with Mike Lawrie at its helm, we fear that there will be far more focus on restructuring and cost cutting than on building. How long will it take for Mr Lawrie to drive the revenue level from US$26billion to US$20 billion? Especially as CSC and HPE’s competitors have just been given 10 months to attack them while the CSC/HPE management are too pre-occupied with their positions, remunerations and stock options in the new company to worry about today’s customers and staff!

By the way, CSC’s Q4 FY16 results were pretty much as expected! Revenue showed a Year-on-Year decline of almost 6% while Earnings per Share of US$0.73 beat Analyst estimates by US$0.05. These results show the company still shrinking and unable to make meaningful sales, while the good old EPS target continues to be hit. The thing is an EPS of $1,000 a share sounds even better yet is worthless when the company has one share outstanding. That is where CSC's strategy is taking it.

8 comments:

Anonymous said...

A question that arises unavoidably is whether the CSC/HPE union will compete against CSRA for contracts down the road. Some had already thought that CSRA represented a residual that the CSC parent wanted to jettison anyway.
A lot of promise and potential hype is getting bandied about, but whether this will come to fruition is a wholly different matter.

Anonymous said...

I wonder if the new company will give the people working at CSC on BHS contract new role opportunities? Or will they be quick win for billion dollar cost efficiencies?

Anonymous said...

Who is BHS?

Anonymous said...

British Home Stores - major UK retailer that has just gone into liquidation, shedding c.11,000 jobs and presumably their IT to boot!

Anonymous said...

Interesting comments from Investor.com article:

"Global Equities Research analyst Trip Chowdhry said the HPE services-CSC merger is the combination of two struggling companies and could result in 65,000 layoffs."

“Two bad assets does not make one good asset,” he said.

I keep thinking there is an end to the extent that stock price can be increased by cutting staff with the inevitably concomitant falling revenues but continue to be surprised...

Anonymous said...

I am confused, how are BHS related to CSC?

Anonymous said...

BHS, known as British Home Stores is a UK company supported by CSC's IT services. CSC took on the contract 10+ years ago after Andersen's walked away from supplying them.
BHS is now failing for all sorts of reasons and will close now leaving a massive hole in the pension scheme.
A story worth watching for CSC would be pensioners as the UK's pensions regulations have holes in them.

Read the press for details http://www.telegraph.co.uk/business/2016/06/06/bhs-effective-corporate-governance-almost-entirely-absent-says-m/

Anonymous said...

Went into one of BHS stores and the till's are old. What was the rest of the IT estate like?