CSC says the two complementary businesses will create one of the world’s “largest pure-play IT services companies, uniquely positioned to lead clients on their digital transformations”, with more than 5000 clients in 70 countries.
Following completion of the transaction — expected by the end of the March 2017 — current chairman, president and chief executive of CSC, Mike Lawrie, will become chairman, president and chief executive of the new company and Meg Whitman, HPE’s president and chief executive, will join the new company’s board of directors, which will be split equally between nominees of CSC and HPE.
Wednesday’s announcement comes six months after CSC separated into two publicly traded companies – CSC, to serve commercial and government clients globally, and CSRA, which serves public sector clients in the United States.
“Our proposed merger with HPE Enterprise Services is a logical next step in CSC’s transformation,” Lawrie said.
“As a more powerful and versatile global technology services business, the new company will be well positioned to innovate, compete and serve clients 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 and collaboration with HPE.”
According to Whitman, the “spin-merger’” of HPE Enterprise Services with CSC is the “right next step for HPE and our customers”.
“Services’ customers will benefit from a stronger, more versatile services business, better able to innovate and adapt to an ever-changing technology landscape. As two companies with global scale, strong balance sheets and a focus on innovation, both HPE and the new company will be well positioned as leaders in their respective markets.”
In just the six months since separation into two separate companies, Lawrie says CSC has taken “decisive steps to equip the company to take clients on this digital journey, positioning itself as a true next-generation leader in the markets, industries and practice areas it serves”.
To back-up his statement, Lawrie lists activity since the merger including:
• Stood up vertically integrated businesses in healthcare and insurance to take full advantage of its IP and existing market leadership
• Created CeleritiFinTech, a joint venture with HCL, to do the same in banking
• Acquired UXC, making CSC one of the largest IT services companies in the Australia-New Zealand region
• Acquired Xchanging Plc, a UK-based provider of insurance software and business process services, creating the number one provider of core insurance solutions globally, and
• Acquired Fixnetix and Fruition Partners to bolster its leadership in banking and capital markets and service management, respectively. Together, Fruition and UXC make CSC the world leader in service management solutions. Yesterday, the company also announced its acquisition of Aspediens, Europe’s leading provider of technology-enabled solutions for the service-management sector.
“Clients are feeling the pressure to digitally transform their enterprises to meet new business demands and customer expectations,” Lawrie noted. “They need a partner with the innovation, scale, leadership and dependability to answer the challenge.
“As a pure play, the combined company will be built to lead digital transformations using next-generation technology solutions from both companies. It will be able to operate independent of any single hardware provider, while partnering with the world’s leading technology providers, including HPE.”
Gartner view of the CSC/HPE merger proposal:
Gartner vice-president, IT services sourcing and vendor management, Jim Longwood, says potential synergies the CSC/HPE merger would deliver in the Asia Pacific region are:
• HPE brings a broader geographic spread that CSC doesn’t have;
• CSC brings a strong consulting and SI capability to add to HPE’s capabilities;
• Both have some regional offshore capabilities in India, Malaysia, Vietnam and Philippines giving them more critical mass to service regional clients;
• Both have a good overlap of verticals with HPE strongerin Telecommunications and CSC with good presence in Healthcare and Utilities;
• In Government, the combined entity will have over $500m in joint professional services revenues, substantially increasing their market share here; and
• Potentially improved critical mass in their BPO operations.
According to Longwood, both companies were facing challenges with “dropping traditional revenue streams and gaining traction in the cloud and other disrupted IT services markets”.
“Whilst somewhat unexpected, it is nonetheless a reasonable merger of two traditional competitors in the IT professional services marketplace.”
And, Longwood says that “marketshare wise’ for Asia Pacific, excluding Japan, the merger from a professional services revenue perspective, will see the combined entity coming in at number 4 behind IBM, Samsung SDS and Deloitte and ahead of Accenture and TCS with just over US$3.6 billion in ITO, AO, consulting, SI and BPO revenues".
Longwood says government clients in the region have already been marginally impacted by CSC’s global break-up into federal US government and private enterprise and overseas government.
“As well, in January 2016, the corporation announced that it had entered into a definitive agreement to separate and combine its Information Systems & Global Solutions (IS&GS) business segment with Leidos. So many government clients are getting used to the flow-on effect and disruptions of mergers in the professional services markets.
“Generally this is positive for both companies to improve not only growth potential. Execution of the integration of the two companies will be critical to achieving the synergies and benefits expected. Whilst consolidating both organisations will lead to some economies of scale, it will also lead into some staff reductions and service and some disruptions to their existing client base which will need to be managed carefully by all parties.”
On other effects from the CSC/HPE merger on the two companies, and more broadly across the total market, Longwood says:
• Potential benefits for customers
The increased critical mass regionally by country, by vertical and in areas like their consulting and SI businesses will be of benefit to their mid to larger scale clients in terms of operational and cost efficiencies and improved access to a better knowledge base. The merged entity will be better equipped to service smaller, mid-size and larger clients but the smaller clients may become disenfranchised by the combined entities' new deal sweet spot and business focus. It should assist positioning the combined entity to be able to assist clients to address the ongoing digital disruption that is going on in the market and focus on other disruptions coming through via social, mobility, analytics and cloud.
• Likelihood of further market consolidation
With traditional service provision, becoming a contracting market, further consolidation, particularly at the smaller end of the market is inevitable. We see the likes of NTT Data expanding globally by incremental acquisitions and similarly for the larger Indian providers. Some of the smaller Indian firms also becoming takeover targets as per the recent acquisition of Igate by Capgemini. With cloud coming in as a services markets, being in high growth, this means that the MAD mergers, acquisitions and divestitures will be a feature prominently in the professional services market for some time to come.
• Market trends
The disruptive impact of non-traditional services, along with entry of many new players like AWS, Google, Microsoft and VMware into the cloud services market and large volumes of small and niche focused service providers, has provided challenges for all traditional IT service providers to balance growth in the new services versus cannibalisation of the traditional services as the emerging as a services offerings coming to the fore. For most of the mainstream traditional managed service providers including CSC, HPE and IBM, this has led to decreasing market share in high single to low double digits in the past two years in constant currency terms with currency fluctuations exacerbating this trend in Asia Pacific.