HP Enterprise (NYSE:HPE) has announced that it is selling off its technology-services division to competitor Computer Sciences Corp. (NYSE:CSC) The transaction will consist of a tax-free spinoff of the HP Enterprise unit and merger with CSC. The new company, whose name will be announced later, will be led by CSC Chief Executive Officer Mike Lawrie. HPE CEO Meg Whitman will have a seat on the new company’s board, which will be split evenly between directors nominated by each company.
According to a statement by the companies, the deal is worth about $8.5 billion to shareholders in HP Enterprise. That 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. The deal is expected to generate $1 billion in cost savings in its first year. The companies expect the deal to close in March 2017.
HP Enterprise is one of two companies formed last year by the breakup of Hewlett-Packard, Inc. The second company, HP Inc., is focused on selling PCs and printers. Spinning off the services division will leave HPE with businesses producing about $33 billion in annual revenue. The company will now concentrate on selling data center hardware, software and other commercial tech gear to big organizations.
With roughly 100,000 employees, the business services division contributes more than a third of HPE’s revenue. But the division has lagged other segments in both growth and profit. Sales in the division being combined with CSC fell 2 percent in the April quarter to $4.7 billion. Meanwhile, revenue in the Enterprise Group, HPE’s largest unit, increased 7 percent from a year earlier, rising to $7 billion.
HPE and CSC had been talking about making such an arrangement for three months. The deal should boost annual revenue for Tysons, Virginia-based CSC to about $26 billion. CSC, whose main business is IT services, is a major provider of services to the U.S. government. The new company will also serve HP Enterprise’s existing customers. Shares in CSC surged more than 27 percent after the announcement.