Meg Whitman's tough decision to spin off a key unit of Hewlett Packard Enterprise (HPE) is resonating with stockholders. HPE shares surged 10 percent to $18 in after hours trading yesterday on word spread about the new direction for HPE.
Whitman, president and CEO of HPE, announced that the Palo Alto, Calif.-based infrastructure and server giant is selling its $20 billion enterprise services business to Falls Church, Va.-based systems integration giant CSC in a deal worth about $8.5 billion. The deal struck a chord with CSC shareholders too, as stock prices surged 23 percent to $43.75 per share on word of the deal.
Under the terms of the agreement, HPE will combine its Enterprise Services unit, which generated for more than one third of HPE's 2015 revenue, with CSC into a combined company of which HPE shareholders will end up owning about half.
Combining HPE, CSC Strengths
Whether HP should have entered the services space in the first place is a moot question given its focus on hardware and infrastructure, but enter it did with the acquisition in 2008 of Electronic Data Systems (EDS) for $13.9 billion.
Just like the acquisition of Autonomy in 2011 for $10 billion, EDS proved difficult to swallow and monetize, weighing down the HP financials to such an extent that HP spit into two last November as it began the laborious process of restructuring.
What emerged after that split was HPE, which houses the former Hewlett-Packard corporate hardware, data center products and services division and HP Inc., which sells PCs.
That was clearly not enough though, and over the past few months Whitman, who has been struggling to turn the HPE juggernaut around, has indicated on a number of occasions that HPE was still too large and clumsy to react in an agile infrastructure marketplace.
In other words, it was just too big to respond to the rapidly evolving data center space, not to mention the emerging Internet of Things (IoT), which HPE is looking to dominate as a network and infrastructure gorilla.
Something had to go, and the IT services business was where the smart money was betting. Sure enough, in what HPE described as a “logical next step in the turnaround” it announced the spin-off last night.
Whitman estimates that the new business created by the spin-off and merger with CSC will produce “cost synergies” of about $1 billion in the first year after close, expected by March 2017.
"The 'spin-merger' of HPE's Enterprise Services unit with CSC is the right next step for HPE and our customers. Enterprise Services' customers will benefit from a stronger, more versatile services business, better able to innovate and adapt to an ever-changing technology landscape,” Whitman, said it a statement.
The new company that combines CSC and HPE's Enterprise Services business is expected to have annual revenues of approximately $26 billion, more than 5,000 customers in 70 countries and employees in every major global region.
Mike Lawrie, CSC's President and Chief Executive Officer, will become chairman, president and CEO of the new company, and Meg Whitman will join its Board of Directors. The new company's board will be split 50/50 between directors nominated by HPE and CSC.
What’s left is an HPE with estimated annual revenues of $33 billion, which Whitman said will focus on secure, next-generation, software-defined infrastructure that provides servers, storage, networking, converged infrastructure, as well as its Helion Cloud platform and software assets.
From a business and economic perspective, it all makes sense. HP is not the only gorilla out there and is already in cut-throat competition with networking giant Cisco, and EMC with its storage muscle.
There are also dozens of new, small agile companies in the IoT and infrastructure space that would be more than happy to cut the competitive legs from under a company like HPE that has, until, now found it difficult to respond to changing markets.
It will be at least 12 months before the impact of the spin off can be assessed, but there are already signs that last November’s spin off that spit HP into two is revitalizing the balance sheets, possibly the main reason Whitman and the board of HPE decided to give it another go.