A Channel Force Arrives: DXC Technology Born From Close Of CSC-HPE Enterprise Services Merger

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The transaction will deliver $13.5 billion in value to HPE shareholders, according to the company, through an equity stake in DXC for HPE shareholders, a cash dividend payment to HPE and DXC's assumption of debt and other liabilities. As a result of the transaction, HPE received a special $3 billion cash payment, and DXC assumed $600 million of net pension liability and $400 million of existing debt.

DXC is trying to turn around the middling fortunes of CSC and HPE ES through heavy investment in emerging technologies and a series of tuck-in acquisitions. Lawrie told investors Wednesday that the CSC and HPE ES brands "were sort of tired," with CSC being "'me too' for a lot of years" and HPE ES being "a captive channel distribution for technology."

The company expects revenues of $24 billion to $24.5 million in its first year of operations, which will end in March 2018, and overall revenue growth of 1 percent to 4 percent through 2020. But there's great variance in the projected performance of DXC's major business groups in the next three years.

DXC traditional IT business – which currently accounts for three-quarters of the company's headcount – is expected to decline by 4 percent to 7 percent annually due to productivity gains, dis-synergies and shifts to digital technologies. Just half of DXC's employees will hold traditional IT roles by March 2020, the company said.

The industry-focused and business process services work of DXC is expected to grow by 7 percent to 10 percent as the company leverages its intellectual property and expertise to capture share in high-growth industries. About half of DXC's clients sit in five digital-intensive industries: healthcare, banking, energy, travel/transportation, and insurance, where DXC is the top provider of software and services globally.

Digital, which is DXC's smallest sector today, is expected to enjoy annual growth rates of 25 percent to 30 percent thanks in part to CSC's $500 million investment in digital offerings over the last two years. DXC today employs: 20,000 Microsoft professionals; 5,000 certified workplace engineers; 4,000 security professionals; 3,500 data scientists/analysts; and 1,000 Amazon Web Services professionals.

The two companies that came together to form DXC had divergent performances in their most recent quarters. Sales for HPE Enterprise Services fell by 11 percent to $4.04 billion, with IT outsourcing revenue declining 8 percent to $2.64 billion and applications and business services sales plummeting by 17 percent to $1.4 billion. 

CSC, meanwhile, saw sales in its most recent quarter climb 10 percent to $1.92 billion, with its Global Business Services (GBS) division seeing sales skyrocket by 18.1 percent to $1.05 billion thanks to business process services offerings and recent acquisitions. Global Infrastructure Services (GIS) saw revenue tick up 0.8 percent to $871 million due to next-generation offerings and recent acquisitions.  

DXC told investors that it plans to expand its digital offerings by executing targeted, tuck-in acquisitions that will account for 1 percent to 2 percent of revenue growth by 2020. Wider margins will create the capital necessary to invest more in digital offerings, the company said.

DXC has some 6,000 clients worldwide, including more than 200 of the Fortune 500. The company believes it can upsell those clients in areas such as workload migration, new workloads, application migration, cybersecurity, big data and mobility.

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