When a merger is an acquisition CSC “Merges” with HP Enterprise Services

Today, May 24th 2016, CSC and HP Enterprise (HPE) announced that the HPE Services unit would be spun out of HPE and merged with CSC which recently spun out its government business. This surprising deal is being positioned as a merger, but as indicated by the Press Release from CSC, with the headline address of Virginia, and Mike Lawrie as CEO, it is clear that this is fundamentally an acquisition, albeit by the smaller of the two providers.

Note that this is on the heels of the deal in Australia for CSC to acquire UXC. With the benefit of time, this deal and the scale of the comparative Australian entities was a good test ground for CSC and HPE to go global. CSC acquires UXC – Boosts Australia

The key facts of the merged entity are as follows:

  • Total Revenue – US$ 26B
  • Total Countries – Over 70
  • Total Clients – 5,000
  • Services Firm Ranking – 3rd largest globally (according to CSC/HPE)

The new and as yet unnamed firm will clearly have significant strength and capability in Infrastructure. It is stunning to realise that the 2nd, 3rd and 4th largest IT services providers 8 years ago are now all the one firm as HP ate EDS, and CSC now has merged/acquired HPE Services. This fact alone highlights how difficult the market has been for Infrastructure Services providers; particularly those who have struggled to maximize the cloud opportunity and shift the delivery model for both application and infrastructure services.

The number of employees of the new entity was not released, but it is clear that there will be “significant synergies” realized in this part of the business. That is of course corporate talk for downsizing. It is however hard to see how much can be cut from the HPE Services business which has been hit in an ongoing manner since the EDS acquisition.

Key Strengths

From the capioIT perspective, these are the key strengths of the deal

  • Scale of infrastructure reach and capability
  • Depth of partnerships with key providers, particularly Microsoft
  • Enhanced reach in core markets such as the US, Australia and UK
  • Strength in security capability and IP
  • Industry strength in Insurance, Transportation and Healthcare

Key Weaknesses

From the capioIT perspective, the key weaknesses are

  • Lack of depth in cloud capability and investment
  • Applications strength will lag several other providers despite recent focus
  • Subscale capabilities in key growth markets of Analytics/Big Data and mobility
  • Industry momentum has dissipated since EDS issue at HPE, hence reliant on smaller CSC industry footpath
  • More disruption for employees, particularly legacy EDS who have been unsettled for many years.

2016 has been the year of mergers in the IT Services sector. This has been predicted for years, and has clearly ratcheted up in pace. This year we have had three very significant and different acquisitions occur (alongside numerous smaller deals)

  • NTT Data acquire Dell Services
  • IBM acquire Bluewolf
  • CSC acquire/merge with HPE Services.

This consolidation will only accelerate. There are now several vendors who are subscale and struggling to adapt to the new business ecosystem. Firms such as CapGemini, CGI and the legacy Indian firms, alongside older firms such as Fujitsu, have to radically change their business to maintain leadership and innovation. On that note, HPE/CSC would do worse to add the likes of CapGemini to their new group to build out their application services, and EMEA capabilities.

The shift of IBM away from hardware and the jettisoning of IT Services by hardware based vendors such as Dell and HP has shown that the model of the integrated IT giant is no longer relevant. Fujitsu from the Japanese perspective at least is now the outlier.

Capture Point

Will the new business work? That is of course the $26 billion dollar question. There is no doubt that the integration has to happen incredibly quickly. The market is moving too dynamically for there to be any delay. CSC and HPE clients are not going to show the same patience in 2016 for a slow or challenged integration. It creates an infrastructure giant alongside an at times vulnerable IBM, so whilst it is a surprise, if the integration happens decisively and the clients stay to course, then the pain of recent years may enable the environment to make it a success. Failure on any of these counts will mean that it is a failure of the deal, and that will impact all parties from clients, partners and employees.

About capioIT - Phil Hassey

If you require further information, please contact Phil Hassey, CEO of capioIT. capioIT is an advisory firm focused on helping organisations to understand emerging technology as the world becomes Digital. Phil may be contacted easily in the digital and real world. phil@capioit.com +61422231793
This entry was posted in Uncategorized and tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.

2 Responses to When a merger is an acquisition CSC “Merges” with HP Enterprise Services

  1. The transaction will consist of a tax-free spinoff of the HP Enterprise unit and merger with CSC. The $8.5 billion value of the deal for HP Enterprise shareholders includes $4.5 billion in stock in the newly combined company, a $1.5 billion cash dividend, and the $2.5 billion transfer of debt and other liabilities.

    • Yes I appreciate that angle, but way from the financial structuring, it is effectively an acquisition. CSC will control the business moving forward. The best test of this that the CEO a CFO are from CSC.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s