HPE: Whitman Aims for ‘Focus,’ Splits the Company Again

by John McIntyre | 6/2/16

The transcript of remarks by Meg Whitman and the rest of HPE’s senior management during HPE’s Q2/Enterprise Services sell-off/CSC merger announcement contains the word “focus” 16 times. Here is a sampling of some of those uses of the word from Whitman, as well as Tim Stonesifer and Mike Lawrie:

• Meg Whitman, President and CEO
  • “I think now that with a super focused mission, we’re going to see some real benefits.”
  • “We are seeing the benefits of our increased R&D and more focused product roadmaps.”
  • “HPE will now have $33 billion in annual revenue and will focus on … ”
  • “The new company will have greater agility, focus, and the ability to drive faster outcome for our customers. It will also have a top notch management team, quite literally the best in the business, and that management will be 100 percent focused on ensuring a smooth transition with no disruption for ES and CSC customers.”
  • “Our (HPE) focus is going to be on next-gen software defined infrastructure with a world-class portfolio of servers, storage, networking, converged infrastructure, hyper-converged, Helion — our Helion cloud platform and our software assets.”
  • “And you probably have guessed by now that I am now a devotee of focus. And this is going to be a laser light focused company that as I think you know is higher growth, higher margin with more robust free cash flows.”
  • “Hewlett Packard Enterprise in a more focused software defined data center and edge strategy … ”
  • “ … part of the benefit of this transaction is focused on a smaller number of businesses that I think play into a sweet spot in IT spend.”
• Tim Stonesifer, EVP and CFO
  • “The team continues to focus on disciplined cost control, decreasing OpEx dollars year-over-year and growing operating profit dollars.”
• Mike Lawrie, Chairman and CEO, CSC
  • “Both of our companies separated last year, within a month of one another into more client-focused pure-play entities … “
  • “HPE Enterprise Services has a proud legacy and brings focus and agility and the ability to drive faster outcomes for clients … “
  • “Employees will become part of a very strong and focused global enterprise that is positioned for success … “
  • “By staying laser focused and working in the same collaborative spirit that has gotten us to this point, we can get to the finish line faster and in a great position to launch the new company.”

Now we know – Whitman is a devotee of focus, and, as has also been shown again with this latest move, a devotee of delivering maximum value to shareholders by a variety of different and creative corporate and financial strategy moves. As we have written previously, the 2015 split of what was HP – and its moribund stock performance in a bull market — into HP Inc. and HPE managed to dramatically increase HP shareholder value when one combines the current value of both resulting companies’ stock prices. Now, Whitman is overseeing the spinoff of HPE’s Enterprise Services group, representing nearly $19B in annual revenue, and subsequent arranged merger of that unit with Tysons, Virginia-based Computer Sciences Corporation, a $8.1B outsourcing and system applications, business processes, and technology and infrastructure provider to both commercial and public sector clients in the financial, health care, manufacturing, energy, retail, transportation, and insurance sectors. In this maneuver CSC is adding Enterprise Services (ES) group’s nearly $19B in annual revenue to its $8.1B, producing a $26B entity in which HPE shareholders will have a 50 percent ownership stake. After the spinoff, the remaining HPE entity will have $33B in revenue, $28B of which will come from servers, storage, cloud infrastructure, networking and converged systems – a product-centric technology supplier to enterprise-class buyers. Note that we didn’t mention IT managed services or outsourcing. See an infographic of the spinoff/merger here.

The company’s press release explains that “(this) tax-free spin-off and merger of its Enterprise Services business with CSC … 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.” In a separate statement attributed to Whitman on the HPE investor webpage titled “The Right Next Step,” she states, “This deal is very exciting because it does two things: it creates a new pure-play global IT services powerhouse, and it unlocks HPE to be more competitive, with faster growth, higher margins and stronger free cash flow.”

CSC is buying the spun-off ES unit for a total value of $8.5B, parsed three ways: $4.5B in stock value in the new/merged company (the 50 percent ownership stake), $1.5B as a cash dividend that will be paid to HPE stockholders, and CSC will also assume $2.5B in debt and other liabilities associated with the ES group. CSC shareholders (and eager new buyers) reacted joyously to the deal as the stock, which has been hovering around the $34 mark, zoomed to near $50 within a few days of the announcement, and analysts are rating it a “buy” and projecting a $63-a-share target price level.

As for HPE shareholders, they are likely giddy: its shares have recently been trading in the $16-ish area, but jumped to over $18 per share after the move was revealed. So, HPE shareholders got an almost immediate 12.5 percent gain in trading value while also receiving a healthy cash dividend and a 50 percent ownership stake in a new $26B IT market powerhouse entity. Even better, Whitman explained that the cost to separate ES from HPE will be offset by lower costs associated with the previously announced fiscal year 2015 restructuring program — no incremental one-time charges will be incurred. Our guess – HPE’s shareholders will be wearing “We love Meg” buttons to the next annual meeting. (Hope my 401K got some of that!)

The “new” HPE will be smaller, essentially focused on selling the array of enterprise-level hardware/solutions offerings in which it claims it holds very strong market positions, ranked No. 1 or No. 2 in servers (1), storage (2), cloud infrastructure (1), networking (2) and converged systems (2).

When Whitman names the key competitors of HPE in the markets it serves, she names IBM, Dell, EMC, NetApp, and Cisco. The looming Dell-EMC merger, a $67B mega-deal that will create an $75B+ goliath, and industry leader IBM are formidable competition indeed in most – if not all – of these product categories. At only about $33B in revenues, it might appear that the remaining HPE is out of its league in a protracted battle against these giants; however, the shedding of the ES group and the significantly strengthened financial position HPE will find itself in may merely be a prelude to more buying and merging moves the firm has in mind to build out its business portfolio. One has to guess that Whitman, et. al., had the selloff of the ES group already in mind when originally making plans to separate HPE from the former HP.

Recent history shows that HP’s Enterprise operations has done a very nice job of powering growth through what Whitman said are “the kind of acquisitions that have worked well for this company in the past. Complementary technologies that we can put through our excellent distribution and support system … so think 3PAR; 3Com; Aruba, all three of those acquisitions have been fantastic for Hewlett Packard Enterprise. And so, we will keep our eyes out for those kinds of acquisitions.” Don’t be surprised in HPE makes a buy of a solid and up-and-coming company with deep market and technology presence in an enterprise infrastructure specific category.

Focus!

As HP and other hardware firms that have split appear to have concluded, there wasn’t much actual synergy between having a hardware technology specialty and also being a provider of services in which that hardware is used. To use a possibly dumb analogy, a company that manufactures rugs would likely find little shared synergy in owning a division that provided cleaning services for rugs, despite an apparent connection. Yes, the manufacturing side would know which customers owned rugs, but the service business would have to compete on its own against other like providers. In this spin-merger deal, both companies, HPE and CSC, benefit from clearer focus. In its last quarterly report, Whitman openly characterized the ES group, which represented legacy consulting and outsourcing business and the integration of the acquired EDS outsourcing operations, as a unit in “turnaround,” which was in the process of restructuring to diversify its customer base, stabilize its revenues, and significantly reducing its cost structure by exiting high-cost data centers, improving low-cost location mix, and rebalancing the workforce. HPE’s Q2 results, released the same day as the spin-merger announcement, did show improving revenue and income performance by the ES operation as Whitman advertised it would in Q1 comments; she characterized ES Q2 results as “outstanding.”

So, CSC is getting a unit that is in the process of righting the ship and one that appears to have significant potential under the right management umbrella and corporate orientation – a good fit for the business CSC is in. As part of CSC, the ES group can also shed one significant market liability it has had to face versus many competitors: many IT services firms, such as CSC, present themselves to clients as “brand agnostic” — that is, they have no particular brand agenda when proposing IT hardware solutions to client problems, but instead propose and implement whatever brand/technology solution best fits the client needs. The ES group, as part of HPE – maker of IT hardware – has a harder time appearing to be brand agnostic in recommending solutions to client problems, even if they are essentially agnostic in practice. CSC has no such shadow over its offerings, though the spin-merger announcement says CSC is somewhat tied to using HPE hardware for three years after the agreement.

Providing and delivering IT or document processing/management services doesn’t necessarily have a strong, advantageous linkage to the act of selling the hardware platforms upon which those services are executed — it’s oil and water. Marketing enterprise IT hardware such as servers, storage, cloud infrastructure, networking and converged systems is a high-velocity, transaction-oriented, manufacturing and technology scale-driven business that operates across a wide range of buyers and vertical markets, and utilizes multiple distribution outlets/channels. The IT managed services sector is characterized by large, longer-term (i.e., slower) contracts negotiated directly with a smaller number of huge, enterprise/government-level buyers, generally concentrated in several vertical industries, has very long sales cycles, is labor-intensive, and delivers services which are specially designed for and implemented for each and every customer. Oil and water together are not a “pure play.”

After several years of relatively stagnant performance, the HP-HPE split has produced at least one dynamic and apparently energized pure play company that has staked out a path for its future and is clearly executing important moves to make that future a reality. HP Inc., the other unit consisting of the PC/laptop and printer/imaging hardware and related services, is staking out new ground in the embryonic 3D printing arena, and a bigger presence in the graphic arts and high-page-volume commercial and industrial print sectors — though that company looks to have its hands full trying to stop the bleeding in both sagging hardware groups at the moment. Whitman’s HPE obviously had no trouble making a major decision to go against conventional wisdom and dramatically shrink the size and scope of its offerings and the company to achieve “focus.” That kind of de-construction move may not be a realistic option for HP Inc., though there is little apparent synergy between the printer and PC groups – other than shared distribution channels and some shared customers. The perception problem for struggling HP Inc., might end up being one of simple comparisons against a very dynamic, and likely more so, HPE operation.

John McIntyre serves as a senior analyst for BPO Media. With more than 40 years of experience in the printing industry as an analyst, product developer, strategist, and marketer, he has covered the printing and supplies sectors for prominent market research firms such as Lyra Research, InfoTrends, and BIS Strategic Decisions, and served with major OEMs such as Samsung, NEC, ACT, and Diablo Systems/Xerox. McIntyre is the former managing editor of Lyra’s Hard Copy Supplies Journal and has been a popular speaker at industry conferences on key issues such as market and business strategies, distribution channels, supplies channels, and the impact of emerging technologies. McIntyre also served as a member of the IEEE 1680.2 (EPEAT II) standards development committee.