Surprise spinoff catapults HPE, CSC stock

Hewlett Packard Enterprise should grow faster after merger with Computer Sciences, CEO says

Less than a year after a landmark split halved Hewlett Packard into two $ 50 billion companies, the software half is at it again.

Hewlett Packard Enterprise ( HPE), run by Meg Whitman, on Tuesday said it was spinning off its enterprise services business and merging it with Computer Sciences Corp. ( CSC) to create an IT services firm with $ 26 billion in annual sales.

The unexpected news sent HPE shares soaring 11% to $ 18.05 in extended trading. CSC shares rocketed 20% to $ 42.

The deal for the new entity, which Whitman jokingly called CSCES, is expected to close in March 2017. CSC is a major provider of services to the U. S. government. News of the spin- off came while HPE released its financial results at the close of markets Tuesday.

The “spin- merger,” as Whitman calls it, “unlocks value” for HPE and its shareholders, she said. HPE and CSC had been talking for three months about such an arrangement to create two new companies: The as- yet- unnamed entity and a more “laserfocused” HPE.

“We ( CSC and HPE) knew each other well after ( the Nov. 1) separation and saw the clear benefits” of a move, Whitman told USA TODAY in a phone interview.

The slimmer, post- split HPE, with expected annual sales of $ 33 billion, should grow faster and at higher margins without its Enterprise Services unit, analysts said.

“When it comes to IT services, it’s about having coverage and global mass,” said Jim McGregor, principal analyst at Tirias Research. “The bigger you are, the more resources you have, the more likely you are to win major contracts.”

In a conference call with analysts earlier, Whitman said the timing was right for a collaboration. “We believe the industry will consolidate, and it was better to be on the front end of that consolidation,” she said.