Why Computer Sciences Corporation and Hewlett Packard Enterprise are rising

CSC ^[1] and HPE ^[2] announced the merger Tuesday to create a global information technology services company with close to $26 billion in projected annual sales under a Reverse Morris Trust transaction, the same deal structure Reston-based government contractor Leidos Holdings (NYSE: LDOS) is using for its combination with the information systems and global solutions segment of Lockheed Martin (NYSE: LMT).

In addition to its focus on the data center, HPE said the remaining standalone company will also focus on developing its next generation of Aruba and computing products for campus, branch, and IoT applications. Further, Mike Nefkens, current EVP and GM of HPE's Enterprise Services business, will be part of the new company's executive team and partner ^[3] with Lawrie ^[4] on building the new entity.

"The transaction is now targeted to be completed by March 31, 2017", said HPE CEO Meg Whitman on the company's earnings call.

CSC boss Mike Lawrie is to be chief executive of the new group. Both HP and CSC said the name of the new company will be announced at a later date. HP acquired EDS back in 2008.

Whitman called HPE's FQ2 the "best performance since I joined in 2011". On Wednesday a survey of German business sentiment rose more than expected, which was a positive sign for the European economy.

He speculated that HPE's Technical Services division, which has been adding new types of services to its roster, will pick up some of the slack.

CEO Meg Whitman said the "enterprise services" division helped bring in customers.

King had similar concerns. The unexpected news sent HPE shares soaring 11%, to $18.05, in extended trading.

"Enterprise Services customers will benefit from a stronger, more versatile services business better able to innovate and adopt to an ever-changing technology landscape", she said. The companies said they expect the agreement to deliver about $8.5 billion to HPE shareholders after taxes - including an equity stake of $4.5 billion in the new company - and a $1.5 billion dividend. HPE, then known as Hewlett-Packard, has struggled since the deal ^[5] was completed eight years ago to turn around the IT outsourcing business, but Whitm an said that with a rebound set to take hold, the time was right to make a deal.

"It's got to be incredibly hard for the HP services employees, who've already been whipsawed by layoff after layoff", King said.

The results and spin-off were released after markets closed Tuesday. Meanwhile, the group posted 1% increase in the revenue to $12.7 billion for the second quarter from the prior-year period and up 5% on a constant currency basis.

The company reported a profit of 42 cents a share, excluding one-time items, on $12.71 billion in revenue, while analysts surveyed by Thomson Reuters had forecast the company to earn 42 cents a share on sales of $12.34 billion.