HPE merges Enterprise Services business with CSC in a bid to create a Global IT Powerhouse

Key Takeaways: HPE Services + CSC 

- Mike Lawrie, the current head of CSC, will become chairman, president and CEO of the new company

- Combined entity will have revenues of about $26 bn with more that 5,000 customers spread across 70 countries

- The merger gives more focus and leverage for both HPE and CSC with the new entity becoming a services powerhouse

- The big question: Can the new entity dent the highly polarized IT outsourcing market?

HPE merging its Enterprise Services business with CSC in a tax-free spin-off is seen as a strategic move as it creates a pure-play services entity in which the combined synergies will give the new entity to take on the highly fragmented yet a polarized IT outsourcing market.

Over the last two years, HP since its bifurcation into two independent companies one catering IT hardware and other to software and services have struggled to hit a sweet spot. The company believes that the spin-off and merger are the next logical 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 mandates. The transaction will be completed by the end of FY17 and HPE shareholders will own shares of both HPE and approximately 50% of the new company.

Commenting on the merger, Meg Whitman, President & CEO, HPE said, “ The 'spin-merger of HPE's Enterprise Services unit with CSC is the right next step for HPE and our customers. Enterprise Services' customers will benefit from a stronger, more versatile services business, better able to innovate and adapt to an ever-changing technology landscape."

The new combined entity will have annual revenues of about $26 bn with more than 5,000 customers spread across 70 countries. News reports say that the combined entity will have about 50K plus employees in India. Globally as per estimates the combined entity will have about 176,000 employees - an employee scale of this size certainly raises questions on the possible layoff as the integration process goes forward. Analysts do expect the layoff in the new entity as both companies create a tightly know delivery plan going forward.

The critical question now is that undoubtedly the merger creates a new outsourcing behemoth, which can take on companies like Accenture and Indian outsourcers like Cognizant. Infosys and Wipro and the likes, on a more level playing field. But how far the new company can dent into this highly polarized market and match up to the cost effective delivery models of the competitors is to be seen.

However, Mike Lawrie, Chairman, President & CEO of CSC is bullish on the synergies and says that “ 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. 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."

Adds Whitman, “"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."

Blending the competencies

The 'scale' is the word - both CSC and HPE’s senior management harps on to this. But a section of the analyst community questions this. For instance, in a shrinking market, does scale makes sense? Today the environment is such that the traditional IT consumption patterns - acquiring IT hardware and topping with in-house and outsourced services in becoming less relevant, What the demand side asks is scale in terms of technology delivered via an on-demand cloud model is needed rather than a product and onsite services.

But both HPE and CSC firmly believe that by combining, both organizations can more rapidly accelerate already-improved financial and operational performance. They say that 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.

With this merger, what’s left with HPE? A standalone HPE, with $33 billion in expected annual revenue, will sharpen its focus on secure, next-generation, software-defined infrastructure that leverages an on a 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.

Reflecting on this Whitman says, "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.”