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Trip Chowdhry On HP Services, Computer Sciences Merger: '2 Bad Assets Does Not Make 1 Good Asset'

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Trip Chowdhry On HP Services, Computer Sciences Merger: '2 Bad Assets Does Not Make 1 Good Asset'
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Hewlett Packard Enterprise Co (NYSE: HPE) said it would complete the spinoff its Enterprise Services business and merge it with Computer Sciences Corporation (NYSE: CSC).

Chowdhry's Take

While the move makes sense as it allows Hewlett Packard Enterprise to focus on enterprise cloud and mobility solutions, Trip Chowdhry of Global Equities Research is bearish on the deal.

"Two bad assets does not make one good asset," Chowdhry wrote, adding that the merger would result in 65,000 layoffs at the combined company.

Chowdhry noted that Computer Sciences, which has 56.000 employees, is a "struggling company."

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In May 2015, Computer Sciences split itself into two companies: the Government Part and the Commercial-International Part. Hewlett Packard Enterprise Services will be merging with the Commercial and International part of Computer Sciences, which has zero win-rates against Infosys Ltd ADR (NYSE: INFY) or Cognizant Technology Solutions Corp (NASDAQ: CTSH).

On the other hand, Hewlett Packard Enterprise Services, which has about 120,000 employees, entered the IT Services business by acquisition of EDS (Electronic Data Systems), in 2009. The analyst said Hewlett Packard Enterprise Services is also struggling, as EDS also has zero win-rates against Infosys and Cognizant.

Noting that the IT Services industry is in "zero-sum" game, Chowdhry highlighted that "combined CSC + HPE Service to layoff more than 65,000 employees of the 176,000 total employees."

Moreover, the analyst noted that the cloud makes many of the services Computer Sciences and Hewlett Packard Enterprise Services provide obsolete, including hardware and software installation, software testing, system management, hardware/software configuration and application maintenance.

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"The market in which CSC and HPE Services play is going to shrink by 40 percent to 60 percent, which will result in more than 65,000 employees to be laid off at the combined CSC and HPE Services company," Chowdhry emphasized.

According to TipRanks, Chowdhry has a success rate of 59 percent with an average return per recommendation of +15.7 percent. The analyst is ranked 273 out of 3,951 analysts.

Hewlett Packard, Computer Sciences' Expectations

However, a press release from Hewlett Packard Enterprise said the new company is expected to have pro-forma annual revenues of approximately $26 billion, more than 5,000 customers in 70 countries and employees in every major global region.

The deal is expected to deliver approximately $8.5 billion to Hewlett Packard Enterprise's shareholders on an after-tax basis, Including a cash dividend of $1.5 billion, and the assumption of $2.5 billion of debt and other liabilities. The merger is expected to produce first-year cost synergies of about $1 billion post-close, with a run rate of $1.5 billion by the end of year one.

Mike Lawrie, the current head of Computer Sciences, will become chairman, president and CEO of the new company, and Hewlett Packard Enterprise CEO Meg Whitman will join the board of directors. The new company's board will be split 50/50 between directors nominated by Hewlett Packard Enterprise and Computer Sciences.

Stocks On The Move

Shares of Hewlett Packard Enterprise gained +14 percent in the pre-market hours on Wednesday to $18.50 after closing Tuesday's regular trading session at $16.25.

Shares of Computer Sciences surged +32 percent in the pre-market hours to $47.20. The stock closed Tuesday's trading at $35.65.

Latest Ratings for CSC

DateFirmActionFromTo
Oct 2016CitigroupUpgradesNeutralBuy
Oct 2016BarclaysMaintainsOverweight
Aug 2016Morgan StanleyMaintainsEqual-Weight

View More Analyst Ratings for CSC
View the Latest Analyst Ratings

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