HPE is expected to have US$33 billion in annual revenue after the spinoff and will concentrate on its remaining enterprise group that includes its cloud services business and makes servers, routers and switches.
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HPE, +9.42% soared 10% on Wednesday after the company announced earnings and said that it would spin off its enterprise services unit in a merger with CSC, but analysts haven’t been as quick to celebrate.
HPE announced the news along with its financial results Tuesday.
HPE called the spin-off and tie-up with CSC the “next logical step” and said it will create a company worth $26 billion that focuses entirely on IT services.
Less than a year after a landmark split halved Hewlett Packard into two $50 billion companies, the software half is at it again. Moreover, CSC stock rallied over 28.3% in the last three months alone. The company still expects non-GAAP earnings per share between $1.85 and $1.95 (mid-point: $1.90). CSC boss Mike Lawrie said that his own company will become more powerful and versatile, and “well positioned to help clients succeed on their digital transformation journeys”.
Tech analyst Patrick Moorhead says Whitman has HPE headed in the right direction: Its first-quarter financial performance marked an improvement in every business segment for the first time since the fourth quarter of 2010. Along with bringing you the news on several new HP products, we most recently we reported on the fact that a tough market has hit HP’s PC revenue.
HP Enterprises CEO Meg Whitman said the new company, which would have a total of 95 data centres, wouldn’t need all of them. In addition to this, the new entity which would be a combination of CSC and Enterprise Services, would pay HP Enterprises $1.5 billion in cash and approximately $2.5 billion in debt along with net pension liabilities.
Global Equities Research analyst Trip Chowdhry said the HPE services-CSC merger is the combination of two struggling companies and could result in 65,000 layoffs.
The deal comes with HPE, Palo Alto, Calif., in the midst of a plan to cut 30,000 HPE services jobs as it takes $2.7 billion in costs out of the business.
HPE also authorized an additional $3 billion for share repurchases.
As for the new company’s board, it shall be split in even between directors nominated by HPE and CSC. Analysts on average had projected profit of 42 cents on sales of $12.3 billion, according to data compiled by Bloomberg.
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Mizuho (Neutral) has boosted its price target on HPE to $16 from $13, and FBN Securities (Outperform) has raised its target to $21 – the latter target implying about 16% upside from today’s higher price.
