HP Enterprise Plans Spinoff, Deal With Computer Sciences

ENLARGE

Hewlett Packard Enterprise is the former H-P business that focuses on corporate technology customers. Photo: Bloomberg News

Don Clark and

Don Clark

The Wall Street Journal

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Tess Stynes

Tess Stynes

The Wall Street Journal

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Updated May 24, 2016 7:50 p.m. ET

23 COMMENTS ^[10]

Hewlett Packard Enterprise ^[11] Co. HPE 6.77 % ^[12] plans to spin off most of its technology services operations and merge them with those of Computer Sciences ^[13] Corp. CSC 42.08 % ^[14], in an $8.5 billion transaction that marks HP Enterprise's latest adjustment to a shifting landscape that is roiling the market for corporate technology.

HP Enterprise will shed a business that accounts for roughly 100,000 employees, or two-thirds of the Silicon Valley giant's workforce.

The deal, a blockbuster follow-up to the breakup of Hewlett-Packard Co ^[15]. last fall, will create a corporate technology services specialist that will be led by Computer Sciences executives and have roughly $26 billion in annual revenue, the companies said. The remaining HP Enterprise operations will concentrate mainly on software, server systems, networking and storage hardware.

MoneyBeat: H-P Deal: 'Just a Financial-Engineering Story'^[16]

HP Enterprise said its estimate of the value of the services unit includes a 50% stake in the new venture created with Computer Sciences, valued at about $4.5 billion, as well as a cash dividend of $1.5 billion and the assumption by Computer Sciences of about $2.5 billion of liabilities.

The move is evidence of ongoing turmoil in the corporate computing market as business spending tightens and traditional data centers give way to cloud computing. HP Enterprise faces increasing competition from cloud-computing vendors including Amazon.com ^[17] Inc. AMZN 0.59 % ^[18] and Microsoft ^[19] Corp. MSFT 1.03 % ^[20] that sell metered access to raw computing power over the Internet. Customers must decide whether to opt for cloud services, maintain conventional data centers, or build their own private cloud-like facilities—a business especially targeted by HP Enterprise.

The combined spinoff and merger, which will focus HP Enterprise more tightly on hardware sales, represents a doubling down by Chief Executive Meg Whitman on a breakup approach to the shifting landscape in contrast to the merger strategy taken by Dell Inc. and EMC ^[21] Corp. EMC -0.18 % ^[22]

"We are creating two great companies that are going to be more focused on a narrower set of businesses," Ms. Whitman said in an interview.

Operations affected by the deal include technology outsourcing and other businesses that were part of Hewlett-Packard's purchase of Electronic Data Systems ^[23] in 2008 for $13.9 billion.

HP Enterprise and Computer Sciences announced the transaction along with fiscal second quarter results. HP Enterprise posted a better-than-expected 1.3% increase in revenue, while Computer Sciences said revenue fell 5.4% to $1.8 billion.

Shares of HP Enterprise rose more than 10% in after-hours trading. Computer Sciences shares rose nearly 25%.

Ms. Whitman, who pushed for the creation of her current company through the H-P breakup ^[24], called the deal a "game-changing" transaction. The service businesses being divested account for about 40% of HP Enterprise's revenue, though were growing more slowly with lower profit margins than its other businesses, she said.

"I believe that services industries will consolidate over time, and better to be at the forefront of that consolidation rather than at the end," she said.

The company long known as Hewlett-Packard developed a reputation for landmark acquisitions, including the EDS takeover ^[25]and the $25 billion deal for computer maker Compaq Computer Corp.^[26] in 2001. Ms. Whitman, who became CEO in 2011, has been steadily undoing the prior growth strategy through moves that include last year's creation of HP Enterprise and HP Inc., HPQ 2.43 % ^[27] the separate entity that now sells PCs and printers.

Ms. Whitman had recently completed the roughly $2.3 billion divestiture ^[28] of its majority stake in China operations that sell networking gear, servers and storage hardware. In April, HP Enterprise unveiled plans ^[29] to sell its majority s take in Indian outsourcing firm Mphasis Ltd. for about $825 million to Blackstone Group LP.

Computer Sciences, in its current form, is also the result of a spinoff. The big services company, based in Falls Church, Va., in November completed the separation of its fast-growing government business ^[30] into a new company called CSRA. That business was merged with SRA International Inc.

After absorbing the former HP Enterprise operations, the company will be led by Mike Lawrie, Computer Sciences' chairman, president and chief executive. Ms. Whitman will join the board, which will have an equal amount of nominees from both companies. The combined company is expected to take a new name, which hasn't been determined yet, Ms. Whitman said.

The deal "is a significant and logical next step forward for both companies," Mr. Lawrie said during a conference call.

HP Enterprise and Computer Sciences said the deal would be tax-free to shareholders. The companies also projected the combination would generate roughly $1 billion in cost savings following the deal's closing, which they expect by next April.

"This is a good marriage," said Crawford Del Prete, an analyst with International Data Corp., adding that it would create a potent services company while extending Ms. Whitman's strategy of making HP Enterprise more nimble and profitable. "Meg is all about focus."

HP Enterprise has already trimmed head count in its services operations, Mr. Del Prete said. The venture with Computer Sciences will compete with services giants such as International Business Machines Corp. and Infosys Ltd. HP En terprise will retain some services operations, including those related to providing technical support for its software and hardware products, Ms. Whitman said.

HP Enterprise, like others that sell products to corporate customers, has been hurt by lackluster demand, currency-exchange issues and other headwinds. But the company showed progress in the latest quarter, which Ms. Whitman characterized as "very strong."

The company reported that server revenue rose 7% in the latest quarter and improved 10% excluding currency effects. Networking equipment sales increased 57%.

In all, HP Enterprise said net income in the quarter ended April 30 rose 5% to $320 million, or 18 cents a share, compared with profit in the year-earlier period of $305 million, or 16 cents a share. Excluding restructuring-related expenses, costs related to its separation and other items, adjusted per-share earnings fell to 42 cents from 43 cents.

The company had projected adjusted per- share earnings of 39 cents to 43 cents.

Revenue rose 1.3% to $12.71 billion, above analysts' expectations of $12.33 billion. Excluding foreign-exchange rates, revenue grew 5%.

HP Enterprise also affirmed its fiscal year outlook.

—Maria Armental contributed to this article.

Write to Don Clark at don.clark@wsj.com ^[31] and Tess Stynes at tess.stynes@wsj.com ^[32]

Correcti ons & Amplifications:
Hewlett Packard Enterprise Co. will shed a business that accounts for about 100,000 employees, or about two-thirds of its workforce. An earlier version of this article incorrectly stated the amount accounted for close to half of the company's workforce. (May 24, 2016)