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What Does HPE Expect from the Enterprise Services-CSC Merger?

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HPE to merge Enterprise Services with CSC

On May 24, 2016, Hewlett Packard Enterprise (HPE) announced that it is planning a tax-free spin-off and merger of its Enterprise Services business with CSC (CSC). This merger will create a pure-play global IT (information technology) service powerhouse with annual revenues of more than $26 billion. The new company will have more than 5,000 customers in 70 countries.

The merger is expected to deliver $8.5 billion to HPE’s shareholders after taxes. This includes an equity stake in the newly combined company that is valued at approximately $4.5 billion and represents a 50% ownership, a cash dividend of $1.5 billion, and the assumption of $2.5 billion of debt and other liabilities.

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Merger expected to close by March 2017

The merger of the two businesses is expected to produce first-year synergies of $1 billion. HPE believes this merger could provide opportunities for additional synergies in subsequent years as well. The cost to separate the Enterprise Services segment from HPE will be offset by lower costs associated with the previously announced fiscal 2015 restructuring program.

HPE CEO Meg Whitman, who will serve on the board of the new company, stated that Mike Lawrie, the current head of CSC will be chairman and CEO of the new company. She added that Mike Nefkens, the current executive vice president and general manager of Enterprise Services, “will become a key part of the new company’s executive team and partner closely with Mike Lawrie on building the new organization.” The transaction is expected to be completed by March 31, 2017.

HPE accounts for 0.8% of the Technology Select Sector SPDR (XLK). The other top holdings of this ETF include Apple (AAPL) (12.9%), Microsoft (MSFT) (9.8%), and Facebook (FB) (6.7%).

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