Hewlett Packard Enterprise Announces Plans for Tax-Free Spin-Off and Merger of Enterprise Services Business With CSC

PALO ALTO, CA–(Marketwired – May 24, 2016) — Hewlett Packard Enterprise (NYSE: HPE) today announced plans for a tax-free spin-off and merger of its Enterprise Services business with CSC (NYSE: CSC), which will create a pure-play, global IT services powerhouse. The spin-off and merger is the logical next step in the turnaround of HPE’s Enterprise Services segment. It also allows a standalone HPE to further sharpen its leadership in building the vital end-to-end infrastructure solutions necessary to power the enterprise cloud and mobility revolutions. 

Immediately following the transaction, currently targeted to be completed by March 31, 2017, HPE shareholders will own shares of both HPE and approximately 50 percent of the new company. The transaction is intended to be tax-free to HPE and CSC and their respective shareholders for federal income tax purposes. 

“The ‘spin-merger’ of HPE’s Enterprise Services unit with CSC is the right next step for HPE and our customers,” said Meg Whitman, president and chief executive officer of Hewlett Packard Enterprise. “Enterprise Services’ customers will benefit from a stronger, more versatile services business, better able to innovate and adapt to an ever-changing technology landscape.”

“As a more powerful, versatile and independent global technology services business, this new company will be well positioned to help clients succeed on their digital transformation journeys,” said Mike Lawrie, CSC chairman, president and chief executive officer. “Together, CSC and HPE’s Enterprise Services will have the scale, foundation and next-generation technologies to innovate, compete and grow in a rapidly changing marketplace. We are excited by the great potential this merger brings to our people, clients, partners and investors, and by the opportunity to strengthen our relationship with Hewlett Packard Enterprise.”

On a pro forma basis, the new company that combines CSC and HPE’s Enterprise Services business is expected to have annual revenues of approximately $26 billion(1), more than 5,000 customers in 70 countries and employees in every major global region. Mike Lawrie, the current head of CSC, will become chairman, president and CEO of the new company, and Meg Whitman will join the Board of Directors. The new company’s board will be split 50/50 between directors nominated by HPE and CSC. CSC’s current CFO, Paul Saleh, will continue in that role in the new company after the transaction closes. Additionally, Mike Nefkens, the current EVP and GM of HPE’s Enterprise Services business, will be a key part of the new company’s executive team and partner closely with Lawrie on building the new organization. Other executives and directors of the merged company, as well as the name of the company, will be announced at a later date.

The transaction is expected to deliver approximately $8.5 billion to HPE’s shareholders on an after-tax basis. This includes an equity stake in the newly combined company valued at more than $4.5 billion, which represents approximately 50 percent ownership, a cash dividend of $1.5 billion, and the assumption of $2.5 billion of debt and other liabilities. The merger of the two businesses is expected to produce first-year cost synergies of approximately $1 billion post-close, with a run rate of $1.5 billion by the end of year one. There is an opportunity for additional synergies in subsequent years. As owners of approximately 50 percent of the merged company, HPE shareholders will share in the value of the synergies, as well as future growth in earnings. 

One-time costs to separate the Enterprise Services segment from HPE will be offset by lower costs associated with the fiscal 2015 restructuring plan; there are no incremental one-time cash payments beyond those already communicated. The transaction is subject to certain customary closing conditions.

Accelerating Focus in Two Businesses
The consolidation of CSC and HPE’s Enterprise Services segment will create a new company with substantial scale to serve customers more efficiently and effectively worldwide. By combining, both organizations can more rapidly accelerate already-improved financial and operational performance. For customers, this enhances global access to world-class offerings in next-generation cloud, mobility, application development and modernization, business process services, big data and analytics, workplace, IT services, and security, combined with deep industry experience in sectors that include financial services, transportation, consumer products, healthcare, and insurance.

At the same time, the transaction should create significant incremental value for shareholders by unlocking the faster growing, higher margin and stronger free cash flow HPE. A standalone HPE, with $33 billion(2)in expected annual revenue, will sharpen its focus on secure, next-generation, software-defined infrastructure that leverages a world-class portfolio of servers, storage, networking, converged infrastructure, as well as its Helion Cloud platform and software assets. By bringing together leadership positions in these key data center technologies, HPE will help customers run their traditional IT better, while building a bridge to multi-cloud environments. 

Beyond the data center, HPE is redefining IT at the edge with its next generation of Aruba and computing products for campus, branch, and IoT applications. In addition, through HPE’s Technology Services division, the company applies the necessary consulting capabilities to help customers. HPE Financial Services offers customers financial flexibility to maximize their investments. And, HPE will continue to leverage its portfolio of operations, security, and big data software assets that deliver machine learning and deep analytics capabilities to customers.

Whitman continued, “As two standalone companies with global scale, strong balance sheets and focused innovation pipelines, both HPE and the new company that combines CSC and HPE’s Enterprise Services segment will be well positioned as leaders in their respective markets. For HPE, our balance sheet, capital allocation strategy, and cost structure will now be fully optimized for a faster growing, higher margin and more robust free cash flow business. And, the new company will be in a stronger position to win than either organization could have been on its own.”

Both the new company and HPE will be well-capitalized and have capital structures set to take advantage of their distinct growth opportunities and cash flow profiles. Each company will have its own equity currency, and investors will have the opportunity to invest in two companies with compelling and unique financial profiles well suited to their respective businesses.

Today’s announcement builds on the progress HPE has made to turn around the Enterprise Services business and improve its operating model, labor mix and financial profile. In FY13, just three customers made up approximately 65 percent of HPE’s Enterprise Services operating profit. Today, no single customer accounts for more than 10 percent. The company has significantly improved HPE’s Enterprise Services cost structure by exiting high-cost data centers, improving low-cost location mix and rebalancing its workforce. Over the three-year period, HPE’s Enterprise Services also has significantly improved service and response quality, leading to best in class net promoter scores from its customers.

As a result of customer diversification efforts and these other improvements, Enterprise Services delivered stable revenue for the first two quarters of fiscal 2016, which were the first quarters of year-over-year constant currency revenue growth since fiscal 2012. In the second quarter of fiscal 2016, Enterprise Services reported its eighth consecutive quarter of year-over-year operating margin expansion. Overall, HPE’s Enterprise Services is on track to achieve its long-term goal of a market competitive cost structure and operating margins.

Goldman Sachs & Co. is serving as financial advisor to HPE on the transaction.

(1)Based on $18 billion in trailing four quarters of revenue for the Enterprise Services segment, adjusted for Mphasis and Communications and Media Solutions (CMS), plus $8 billion in trailing 4 quarters of revenue for CSC, adjusted for recent acquisitions.

(2)Based on trailing four quarter segment revenue for EG, SW and HPEFS; HPE revenue is total HPE revenue calculated on a trailing four quarter basis, including inter-company eliminations, less the Enterprise Services segment, excluding Commercial and Media Solutions (CMS).

Financial Outlook
For the fiscal 2016 third quarter, Hewlett Packard Enterprise estimates non-GAAP diluted net EPS to be in the range of $0.42 to $0.46 and GAAP diluted net EPS to be in the range of $1.10 to $1.14. Fiscal 2016 third quarter non-GAAP diluted net EPS estimates exclude an after-tax gain on the divestiture of H3C technologies and other of approximately $1.06, and after-tax costs of approximately $0.38 per share, related to restructuring charges, the amortization of intangible assets, separation costs and acquisition and other related charges. 

For fiscal 2016, Hewlett Packard Enterprise estimates non-GAAP diluted net EPS to be in the range of $1.85 to $1.95 and GAAP diluted net EPS to be in the range of $1.68 to $1.78. Fiscal 2016 non-GAAP diluted net EPS estimates exclude an after-tax gain on the divestiture of H3C technologies and other of approximately $1.06, and after-tax costs of approximately $1.23 per share, related to restructuring charges, the amortization of intangible assets, separation costs, acquisition and other related charges and tax indemnification adjustments. 

Investment Community Conference Call
HPE will extend its conference call to discuss its fiscal second quarter financial results today to elaborate on the transaction; the call will start at 4:30 p.m. ET. Mike Lawrie, CSC’s chairman, president and CEO, will participate in the call to discuss this transaction along with HPE management. For webcast details, go toinvestors.hpe.com.

About HPE
HPE is an industry-leading technology company that enables customers to go further, faster. With the industry’s most comprehensive portfolio, spanning the cloud to the data center to workplace applications, our technology and services help customers around the world make IT more efficient, more productive and more secure.

About CSC
CSC (NYSE: CSC) leads clients on their digital transformation journeys. The company provides innovative next-generation technology services and solutions that leverage deep industry expertise, global scale, technology independence and an extensive partner community. CSC serves leading commercial and international public sector organizations throughout the world. CSC is a Fortune 500 company and ranked among the best corporate citizens. For more information, visit the company’s website atwww.csc.com.