Spinning off or building up?

HPE’s DXC deal is now complete. Will the ES sale deliver the agility that HPE CEO Meg Whitman says was behind the move?

When Hewlett Packard Enterprise (HPE) announced a year ago that it was spinning off its enterprise services (ES) business and merging it with CSC to create a jointly-owned new company, eyebrows were raised. While the deal was expected to result in US $26 billion in annual revenues for the new company, with nearly 6,000 clients in 70 countries, and would deliver HPE shareholders 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 by the new entity of $2.5 billion of liabilities and debt from HPE Enterprise Services, people still wondered why HPE was apparently dumping the 2008 $13.9 billion acquisition of EDS that had been its entrée into the lucrative services business.

This month, the deal was completed, and DXC Technology Company was born, with Mike Lawrie, former CEO of CSC, at the helm (HPE’s CEO, Meg Whitman, is a board member). And the market, so far, has loved it, with analysts at RBC rating it “outperform.”

Courtesy of DXC Technology. Unauthorized use not permitted.

The new company has come out swinging, announcing an expanded alliance with Amazon Web Services (AWS) that makes DXC, already a Premier AWS Partner Network (APN) partner and an audited AWS Managed Service Provider, a preferred provider for AWS hybrid and innovation cloud-enablement services. It also unveiled an extension to its current Microsoft Azure portfolio, adding a hybrid cloud solution based on the Microsoft Azure Stack.

But the question still looms – why? What prompted HPE to look for a way to spin off ES?

Mike Lawrie, CEO, DXC Technology

If you wade through the marketing speak (CEO Lawrie said in a statement, “The DXC Technology brand will be built on a foundation of trust and transformation, and a relentless drive to help clients thrive on change. We will focus on producing greater value for clients, partners and shareholders, along with growth opportunities for our people.”, which basically articulates the same goals any well-run company has), it comes down to one thing: focus. In an interview at last year’s Discover conference in London, Whitman said that at the time that HPE and HP Inc. became separate entities, she looked hard at the new HPE, and at which parts of it aligned with HPE’s mission. And she said, “While we like our enterprise services business very much, it’s just not central to the mission. They’re probably better off in a pure play environment with CSC.”

For the same reason, Whitman also decided to spin the application software business off to Micro Focus (that deal is expected to close in August) – she felt that it, too, would thrive better in a pure play environment. “We’re excited about that,” she said. “They [Micro Focus] manage mature software assets, they manage growth software assets, and this will be the sixth largest software company in the world.”

The new services company will remain close to home in many ways. HPE ES managed IT for HP Inc. as well as for its parent, and Whitman said that DXC will run IT for both HP Inc. and HPE. “Our entire IT team, or a big chunk of it, is going to ES/CSC, and they will in turn give services back to us, and back to HP Inc.” she said. “They can run the basic services, and HPE IT can double down on the innovation.” At the same time, HPE is hanging on to its customer support and some consulting services.

HPE isn’t the first company to decide to get rid of an expensively acquired services business. In March 2016, Dell sold its IT services subsidiary, Dell Services (the former Perot Systems) to NTT Data for $3.06 billion, $800 million less than it paid for it in 2009, as it divested some non-core assets to pay for its acquisition of EMC. Like HPE, it retains a working relationship with its former services arm.

Meg Whitman, CEO, HPE

The changing business environment was another consideration in her decision to split the company, and then to divest non-core businesses, according to Whitman. Today’s world requires nimble companies, and HP, in its original form, was anything but. She noted, “A US $110 billion company, with seven major lines of business in 170 countries, selling through 250,000 VARS, was the opposite of fast and nimble.” The split, followed by the paring down of non-core offerings, was designed to put HPE (and HP Inc., for that matter) in a better position to compete. Now Whitman is focusing on delivering innovation, and building the right partner network because, she said, “Innovation in the digital age is a team sport.” But she’s not discounting the possibility of acquisitions in HPE’s focus areas: hybrid IT, the intelligent edge, and the services to enable them (she thinks, however, that building security into the new offerings will happen through partnerships with security companies).

And right on cue, HPE has acquired Nimble Storage. With its predictive all-flash and hybrid-flash storage, it fits neatly into the focus areas and fleshes out HPE’s portfolio to cover a larger segment of the market. And earlier this year, it snapped up SimpliVity, a software-defined data management platform. Now, with Nimble plus SimpliVity and 3PAR, the company has storage offerings that can serve customers both large and small.

This all adds up to, not a desperate company that’s dumping things in an effort to recover, but rather a company with a strategy that it’s implementing in a thoughtful way. Whether or not it’s a good strategy for the long term remains to be seen, but the fact that HPE is willing to radically disrupt itself is a sign that it is moving towards that nimble and agile company of Whitman’s vision.

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