HITS

It took nearly a year, but Hewlett Packard Enterprise (HPE) has completed the spin-off and merger of its Enterprise Services (ES) business with Computer Sciences Corporation (CSC) to create DXC Technology, HPE said April 3.

The transaction is expected to deliver about $13.5 billion in value to HPE and its stockholders on an after-tax basis, including an equity stake in DXC for HPE’s stockholders, a cash dividend payment to HPE and DXC’s assumption of debt and other liabilities, HPE said. HPE stockholders received about 0.086 shares of common stock in the new company for each share of HPE common stock that they held since the applicable record date, the company said.

As previously announced, about 50.1% of the outstanding shares of DXC common stock is now held by pre-merger HPE stockholders, while about 49.9% of the outstanding shares of DXC common stock have been issued to pre-merger CSC stockholders. The total value of the equity for HPE stockholders is valued at about $9.5 billion, HPE said. Also as a result of the transaction, HPE received a $3 billion special cash payment, with $1.5 billion earmarked for the retirement of existing debt, while DXC assumed $600 million of net pension liability and $400 million of existing debt, HPE said.

The transaction “unlocks a stronger, more focused HPE, well positioned to compete and win in today’s rapidly changing market,” it said in a news release.

But, as a result of the transaction’s completion, HPE said it had to reduce its profit forecast for the current fiscal second quarter that started Feb. 1, as well as the current fiscal year. That’s because ES will no longer be factored in HPE’s financial results.

As previously disclosed, the ES transaction will hurt HPE’s second quarter diluted earnings per share (EPS) by about 8 cents and fiscal 2017 diluted EPS by about 42 cents, it said. It now expects second-quarter adjusted EPS to be 33-37 cents, down from its prior estimate of 41-45 cents, and fiscal 2017 adjusted EPS to be $1.46- $1.56, down from its prior estimate of $1.88-$1.98. On a GAAP basis, HPE now expects second-quarter EPS to be a loss of 3-7 cents, weaker than its prior EPS forecast of a 3-cent loss to a 1-cent profit, and fiscal 2017 EPS to be 27-37 cents, down from its prior estimate of 60-70 cents. HPE shares were down 2.17% at $17.37 in afternoon trading April 3.

The decision to spin off ES and merge it with CSC was a “next logical step” for the companies, CSC CEO Mike Lawrie said on HPE’s May 24 second-quarter earnings call last year.

Over the past few years, both CSC and HPE had “embarked on critical turnarounds and broad-based transformations,” he said. The turnaround strategy of Hewlett Packard (HP) was the more publicized of the two as the computer giant split itself into two companies, with HP remaining in the PC business and HPE focusing on data center products and services. Lawrie and HPE CEO Meg Whitman joined their respective companies within about six months of each other, and both companies “have been on upward trajectories with significant improvements in financial performance and in client satisfaction scores, and the progress has been real and it has been measurable,” Lawrie said.