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CSC, HPE Enterprise Services Merge To Form $26B Solution Provider Behemoth

CSC and HPE Enterprise Services are shaking up the channel hierarchy with news Tuesday that the two are merging into a single $26 billion behemoth, a move that positions the combined company as the third largest solution provider in the market.

CSC and Hewlett Packard Enterprise's Enterprise Services segment are shaking up the channel hierarchy with news Tuesday that the two are merging into a single $26 billion behemoth, which will then be the third-largest solution provider in the market.

The merger creates a single solution provider business with 5,000 clients across 70 countries and $26 billion in annual revenue. The combined company is expected to achieve cost savings of $1 billion, with possible further synergies to be realized in subsequent years, CSC said.

In wake of the news, HPE shares rose 10 percent to $17.94, while CSC shares soared 20 percent to $42.

The combined company will be led by CSC CEO Mike Lawrie, who will serve as CEO. HPE President and CEO Meg Whitman will serve on the company's board of directors. CSC CFO Paul Saleh will remain with the company in his current role and Mike Nefkens, HPE Enterprise Services executive vice president and general manager, will join CSC, reporting to Lawrie, CSC said.

[Related: New Day Dawns: CSC Split, SRA Merger Done, Spawning $8.1B Commercial, $5.5B Public Sector Powerhouses]

The news comes on the heels of drastic periods of transformation at both companies, with HPE completing its split from Hewlett-Packard late last year and CSC splitting off its federal business to merge with SRA International in November.

The goal of the split was to transform CSC into a provider of "next-generation technology solutions," CEO Lawrie said in a statement. That transformation has included the addition of vertically integrated businesses and multiple acquisitions to boost its regional and technical capabilities. The most recent of those acquisitions was Aspediens, which the Tysons, Va.-based company revealed earlier this week.

The merger with HPE Enterprise Services is the next step in that transformation, Lawrie said.

"Our proposed merger with HPE Enterprise Services is a logical next step in CSC's transformation," Lawrie said in a statement. "As a more powerful and versatile global technology services business, the new company will be well positioned to innovate, compete and serve clients in a rapidly changing marketplace. We are excited by the great potential this merger brings to our people, clients, partners and investors, and by the opportunity to strengthen our relationship and collaboration with HPE."

Combined capabilities of the two companies include customer service and IT operations, technology expertise across a variety of verticals, global delivery and data center scale, a range of best-of-breed partners, and enhanced investment for new services and solutions, CSC said.

The move greatly increases CSC's scale, bumping it up from its current position of No. 5 on the CRN 2015 Solution Provider 500 list, with $8.1 billion in revenue, to No. 3, with $26 billion in revenue. That jump positions it squarely behind competitors Accenture and IBM Global Services, which are No. 2 and No. 1, respectively, on CRN's list.

"This is quite the blockbuster," said John Caucis, senior analyst at Technology Business Research.

Caucis said the deal makes sense for CSC given HPE's portfolio of next-generation capabilities and the opportunity it presents to add scale. In particular, he said, HPE Enterprise Services adds capabilities around the health-care vertical.

Patrick Heffernan, principal analyst and practice manager at Technology Business Research, said in an email that the merger seemed to be "all about scale," which he said is exactly what both companies lacked independently against IBM and Accenture.

"Combining gives them a better chance," Heffernan said.

However, Caucis said, he didn't know if it would increase CSC's competitiveness against Accenture and IBM, saying Accenture remains stronger on the advisory side of the business and IBM will still have significantly more scale.

The merger is expected to close in March 2017.

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