Whitman: CSC-HPE Blockbuster Deal Is Game Changer For New $26B Services Company And HPE

Hewlett Packard Enterprise CEO Meg Whitman on Tuesday told Wall Street analysts that the merger of HPE's $20 billion services business with systems integrator CSC in one fell swoop creates a $26 billion, market-leading, pure-play global IT services powerhouse and a more agile, sharply focused $33 billion software-defined infrastructure company.

Whitman said she sees a combined CSC and HPE services company as a new "powerhouse IT services company" able to grab share in a consolidating IT outsourcing market, while HPE will be positioned to move even faster in the software-defined infrastructure market.

"In some ways, shareholders get the best of both worlds," she said. "They get to maintain a position in Hewlett Packard Enterprise with a more focused software-defined data center and edge strategy, and they get to ride the upside" of a global services business.

[Related: Partners: To Sell Former Services Business To CSC Is A Winner For The Channel]

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"The time is right now, because we believe this [outsourced IT] industry will actually consolidate, and it is better to be on the front end of a consolidation play than the back end of a consolidation play," Whitman told analysts.

HPE said the CSC transaction is expected to deliver $8.5 billion to shareholders on an after-tax basis. The deal gives HPE shareholders a 50 percent ownership stake in the new services business valued at more than $4.5 billion, a cash dividend of $1.5 billion. The deal also requires HPE to assume $2.5 billion of debt and other liabilities.

Former HP CEO Mark Hurd, who is now co-CEO of HP rival Oracle, originally paid $13.9 billion for EDS -- which became the HPE Enterprise Services business. HPE, then known as Hewlett-Packard, has struggled since the deal was completed eight years ago to turn around the IT outsourcing business, but Whitman said that with a rebound set to take hold, the time was right to make a deal.

"Two years ago, we were struggling in this business," she said. "We have diversified the revenue. We have taken costs out. We have developed some new product lines and I think combined with CSC, it is going to be a powerhouse IT services company."

The deal comes with HPE, Palo Alto, Calif., in the midst of a plan to cut 30,000 HPE services jobs as it takes $2.7 billion in costs out of the business.

Whitman, who will join the board of directors of the new CSC HPE Enterprise Services company, said that by the time the deal closes as expected in March 2017, HPE will have achieved 60 percent to 70 percent of the job cuts and cost savings. She said there will be $1.5 billion in additional synergies that result from consolidating some of the data centers and offshore delivery centers of the combined businesses.

The deal includes a "commercial agreement" aimed at making sure that Tysons, Va.-based CSC keeps the current HPE hardware and software product sale "pull through" from the services business at the current level over the next three years, said Whitman. "At a very minimum, the baseline will be maintained and there is an upside in earning more business with CSC," she said.

As for the remaining $33 billion, next-generation software-defined infrastructure business, Whitman said that that business will be a "higher growth, higher margin" business with more "robust" free cash flow. "I am a devotee of focus, and this is going to be a laser-like-focused company," she said.

HPE partners for their part said they see the CSC and HPE deal opening up new opportunities for the channel, with HPE more sharply focused on selling its servers, storage and networking along with HPE's Helion cloud business and various software assets more aggressively through channel partners.

The CEO for one top HPE enterprise partner, who did not want to be identified, said the deal could put to an end a growing channel conflict issue with HPE's services business increasingly competing with partners in some Fortune 1000 deals.

"We've seen a lot more channel conflict over the last year with [HPE] ES coming into accounts that we had standing relationships with," said the executive. "We saw some desperate behavior from ES in the midst of the layoffs. I think this could alleviate channel conflict and it certainly further refines the HPE focus on the software-defined data center."

Martin Wolf, president of martinwolf M&A Advisors of Walnut Creek, Calif., one of the top channel investment advisory deal makers, said he sees the HPE CSC deal as plus for both CSC and HPE.

"The professional services business of HPE fits in very nicely with CSC," he said. "It gives CSC more scale and it gives separation for HPE to focus on software-defined infrastructure, cloud and software."

The key to whether the new CSC-HPE services is ultimately successful will depend on how well the two separate businesses are integrated together, said Wolf.

"The integration part is of critical importance," he said. "There are cost takeouts here, which means potential customer breakage. These kinds of deals have been done well in the past and they have been done poorly in the past. If this is done well, I think they will create meaningful shareholder value."