If You Spinoff HPE Into CSC, You Get DXC- Meg Whitman Tries A Reverse Morris Trust Transaction

Spinoffs: Once you start, you just can’t stop. Roughly a year after breaking the famed Hewlett Packard into two pieces, Hewlett Packard Enterprise (HPE) CEO Meg Whitman is at it again. This time the structure is a bit more complex than a straight spinoff though. It’s our old friend, the Reverse Morris Trust transaction. Real veteran stuff.

On March 20th (the date of record), HPE will distribute shares of Everett Co (its enterprise services business) to shareholders. Then an Everett sub will merge with Computer Sciences Corporation (CSC) and CSC shareholders will receive one share of Everett for every CSC share owned. The company will then change its change to DXC Technology and trade under the ticker ‘DXC’. Ultimately, HPE shareholders should end up owning 50.1% of the newly combined company with CSC shareholders owning the remaining 49.9%.

Wow. Lucky that both companies are spin veterans. Computer Sciences Corporation created CSRA in 2015 after spinning off its public sector business and merging it with SRA in another Reverse Morris Trust transaction.

HPE expects the deal to deliver over $8.5b in value to shareholders broken up into an equity stake in the newly combined company valued at more than $4.5 billion, a cash dividend of $1.5 billion, and the assumption of $2.5 billion of debt and other liabilities. The companies plan for the new entity to deliver big on the synergy front with at least $1b being generated. The new company is no slouch and is expected to have revenues of over $26b and over 5,000 customers. Mike Lawrie, CSC’s current boss, will become DXC’s chairman, president and CEO. Ms. Whitman will join a board that is split 50/50 HPE/CSC. Corporate spending is a tough business, but the hope is a bigger and stronger entity can better win business.

According to CEO Meg Whitman, the deal will unlock ‘the faster growing, higher margin and stronger free cash flow HPE’. Somewhat amazingly, HPE will shed 100,000 employees or nearly two thirds of its workforce as part of the deal. Additionally, according to Ms. Whitman, the deal will make HPE 100% ‘channel focused’, whatever that means. Ms. Whitman added some more on the transaction:

At the same time, the transaction should create significant incremental value for shareholders by unlocking the faster growing, higher margin and stronger free cash flow HPE. A standalone HPE, with $33 billion(2) in expected annual revenue, will sharpen its focus on secure, next-generation, software-defined infrastructure that leverages a world-class portfolio of servers, storage, networking, converged infrastructure, as well as its Helion Cloud platform and software assets. By bringing together leadership positions in these key data center technologies, HPE will help customers run their traditional IT better, while building a bridge to multi-cloud environments.

HPE has been very active under Ms. Whitman. It recently reached a deal to acquire Nimble Storage (NMBL) and is also in the process of spinning off its software assets in a deal with Micro Focus in a transaction expected to be completed later this year. The HPE/HPQ breakup has so far delivered stellar returns and hopefully Ms. Whitman’s continued bet on ‘focus’ will continue that trend.

Disclosure: Author holds no position in any stock mentioned.

5 thoughts on “If You Spinoff HPE Into CSC, You Get DXC- Meg Whitman Tries A Reverse Morris Trust Transaction

  1. Pim Koelman

    Have you found an angle for any arbitrage opportunity?

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