10 Potential Aftershocks Of The CSC-HPE Enterprise Services Merger

Beyond The Deal: How It Might Impact The Channel

The pending merger of CSC and the Enterprise Services unit of Hewlett Packard Enterprise could send a series of aftershocks through the channel leading solution providers to change their game plans and adjust to the new landscape this merger creates in the market.

During his company's earnings call late last month, Larry Prior, the CEO of CSRA, which CSC spun off last year, likened the CSC-HPE deal, which will create a $26 billion channel heavyweight, to a large stone being thrown into a pond.

"This is a spectacular moment -- we'll see how it ripples across our market," he said.

The new company would become the third-largest channel player behind IBM and Accenture.

Here are 10 of the biggest potential aftershocks of the merger that could shake up the channel universe.

10. There Could Be More Channel Consolidation

HPE CEO Meg Whitman (pictured) said the merger represents the "front end" of a channel-wide consolidation spree. She said moving ahead of the consolidation wave is better than being behind it, noting that the deal will accelerate synergies and a turnaround for the combined company.

Consolidation in the channel is nothing new. In 2015, the channel witnessed a record amount of activity, especially those involving cloud-based solution providers aimed at capturing opportunity amid the continued rise of cloud computing and the shifting of business models toward recurring revenue.

But in the wake of such a large merger, this deal may signal the start of an acquisition play for companies sitting at the top of CRN's Solution Provider 500 list, with the larger companies looking to one-up each other with their own increase in scale, and that could touch off a series of tremors throughout the channel.

9. This Deal Is The Best Chance For CSC And HPE Enterprise Services To Turn Around

Although both CEOs said their companies are seeing a turnaround marked by their most recent quarterly reports, it's no secret that both CSC and HPE's enterprise services unit have not had a great run over the last few years, and this merger looms as the best effort to right the combined ship.

In unveiling the deal, both CEOs -- Meg Whitman of HPE and Mike Lawrie (pictured) of CSC -- said the companies had seen better days, with HPE's unit losing money each quarter since its financial data was broken out beginning in 2013. In all, revenue fell 22 percent from 2013 to 2015.

Lawrie said CSC has seen similar issues, leading to a restructuring and finally, last November, its split with what is now CSRA. The split slimmed down CSC and made it more agile.

8. HPE Could Become More Channel Focused

By lopping off its enterprise services unit, HPE is slimming down to become more agile and focused, Whitman said. It will make HPE a "100 percent channel-focused" company," she said this week at HPE’s Discover conference in Las Vegas.

A number of partners told CRN at Discover that they had experienced sales conflicts with Enterprise Services. They see the CSC deal as a watershed moment of sorts, accelerating sales engagement in the field as HPE hones its focus on partners.

One partner, Rich Baldwin, chief strategy officer at Nth Generation Computing, of San Diego, said the spinoff gets rid of a "burden" that will lead to a faster-moving and more agile HPE. "That is 100,000 employees they no longer have to manage," he said.

7. L ayoffs Are Coming

Both Whitman and Lawrie highlighted the fact that the new company will see cost savings of over $1 billion within a year after the merger, and $1.5 billion each year thereafter. Savings like that aren't going to come without job cuts.

HPE has already committed to cutting between 25,000 to 30,000 employees to save more than $2 billion in the enterprise services business, and CSC has been cutting headcount since 2012.

Although Lawrie said the two companies will take advantage of a number of synergies, including consolidating the combined company's 95 data centers and delivery centers, it's certain that by the time this deal closes, CSC will employ fewer people.

6. Competitors May Find Short-Term Opportunities

While it's unclear exactly which parts of which company are going to continue on into the new entity, it's clear that the process will take nearly a year to sort everything out. But while that happens, competitors will look to capitalize.

It's certain that some offerings from both CSC and HPE Enterprise Services will be abandoned due to the merger and the synergies that will come along with it, so clients of each company may start looking elsewhere for IT solutions to dodge any confusion resulting from the merger.

Inder Singh, senior vice president and chief marketing and strategy officer at Unisys – a CSC competitor, said HPE and CSC will be busy figuring out their own business while other solution providers, such as his, will focus on creating better products and services to capture business.

5. IBM Is May Hit The Gas On Acquisitions

IBM Global Services has been sitting at the top of CRN's Solution Provider 500 list since 2008, with only Accenture and HPE vying for that number two spot within the last five years.

However, with the scale that CSC will gain from the merger, the new company will come out as a serious scale contender to IBM.

That might spark IBM into a ramp-up of its already busy acquisition schedule as the channel giant looks to maintain its lead in the market.

In fact, in an article on Investors.com, Citigroup analyst Jim Suva said in a report that the CSC-HPE deal may put pressure on IBM to consider making acquisitions to add to its services business.

4. Xerox Might Become An Acquisition Target

One acquisition target in the market might be Xerox's services unit, which has been successfully utilizing its managed print services model across its enterprise business and, more recently, has pushed to expand its work in the channel.

The channel success that Xerox – whose Global Services division ranks No. 9 on CRN's Solution Provider 500 list - has had recently might prompt a company to target it in an effort to increase scale and move deeper into the channel.

In the Investors.com article, the report by Citigroup analyst Suva said the CSC merger will "cause Xerox services to be looked at as an acquisition target."

A potential acquisition might be even more likely now that Xerox intends to split its BPO and Document Technology units into two companies, leaving the services unit part of a smaller whole and potentially easy to grab.

3. Distributors Could Emerge As Winners

Robert Dutkowsky, CEO of distributor Tech Data, says HPE's move to drop its enterprise services business will be good for distributors, and the channel itself.

He said that when it comes to the advanced products HPE sells, services are necessary for end users to successfully implement them, and without HPE having its own unit providing those services, it falls to the channel.

Dutkowsky said distributors that are ready to help resellers service HPE’s products will be more valuable to resellers, and can increase the work they do with their partners.

In an interview with CRN, Whitman said the deal will make HPE a more focused company and will strengthen its relationship with the channel.

2. HPE Will Rely On The New CSC, At Least For Now

Since the deal was announced, Whitman has been emphasizing the importance of HPE’s cloud strategy moving forward, noting that a smaller, nimbler HPE will focus on converged infrastructure, hyper-converged systems and the Helion cloud platform.

However, when she was asked about how HPE’s focus on cloud will sit with the CSC deal, she revealed that Helion’s virtual private cloud and managed private cloud are currently delivered by the company’s enterprise services unit and will be delivered by the merged entity moving forward.

That means HPE is going to rely on the new CSC for its private cloud delivery. However, the agreement between HPE and CSC is only for the next three years. After that, the companies can go their separate ways.

1. HPE And HP Inc. Will Help Get CSC Off The Ground

Following the merger, the new company will be signed to a three-year contract as HP Inc.'s and HPE's official service provider.

This deal will be a significant one for the new company as it starts out, with Lawrie pointing out that with HPE and HP as clients, the company's profile will be "a much healthier mix," and will help the company grow some of its emerging segments, such as cloud.

In the big picture, this deal will allow CSC to start to polish its newer, emerging services and platforms, making the company more competitive in the cloud-platform landscape. The deal should also give the new CSC a little extra stability as it focuses on its new role.