This Time It's Real: Why CSC Is About To Split

For years, rumors have swirled around CSC being acquired or selling off parts of the company, but this time analysts said the time is right for splitting the company in two.

On Thursday, Reuters reported the systems integration giant is separating the commercial and government businesses, as soon as its earnings call Tuesday. Analysts from Thomson Reuters expect CSC to report first-quarter revenue of $2.96 billion down from $3.33 billion in the year-ago quarter, and a first-quarter EPS of $1.2 billion, up from $1.09 billion in the first quarter last year.

The company is No. 4 on CRN's 2014 Solution Provider 500 list.

CSC had no comment on the matter.

[Related: Report: CSC Set To Split In Two]

"I think it would be [a good move]," said John Caucis, practice manager and senior analyst at Technology Business Research, a Hampton, N.H.-based company that closely tracks the system integration market. "It would enable the CSC commercial side and NPS to refocus on their core and perhaps be freed from any organization competition for internal resources. They would be able to refocus on their core markets and retrench."

The $12.6 billion Falls Church, Va.-based CSC’s move to sell off $450 million in government IOUs to a group of banks and other buyers lends credence to the report that a split is likely, said Caucis.

"What that would do is make the asset a bit more attractive to a buyer," he said."Basically, it takes a little more pressure off of the balance sheet. That's one thing that makes me think this is more real than it has been in the past. CSC realizes that with all of the reorganization and restructuring since [CEO] Mike Lawrie came on board a few years ago, they've come to the realization that it would behoove both their commercial business and their long-standing U.S. federal business to go their separate ways, to be free from one another and just to make the change right now."

In its move to divide, CSC would join a number of high-profile technology companies that are splitting up in response to market pressure from the shift to cloud computing. Among the vendors announcing plans to split in two or spin off pieces of the company are Hewlett-Packard, Symantec, IBM and eBay.

Steve Halligan, president and COO of Washington, D.C-based N2Grate, a data center and cloud solutions provider in the federal IT market that and CSC partner, said that by splitting in two, both the commercial and federal businesses would be more successful because it would sharpen the focus of both businesses.

"We're excited about it," said Halligan of the potential split. "CSC is a very formidable federal and public-sector practice. The ability for an organization of that size to be dedicated just to the complexities and nuances of the federal market space, as a teammate, partner and supplier to CSC, we're excited about greater focus. The commercial business has not been growing to the extent that federal has. For somebody who tries to do both commercial and federal, it's a struggle. There is competing priorities and resource demands. With greater focus will come greater result ... When you have something riding down something else, split it and let each stand on their own. They're big enough to do that."

The potential split comes after Reuters reported in late February that CSC, which has a market value of $9.49 billion, was being pursued for a sale to private equity firm Carlyle Group and fellow solution provider behemoth Capgemini. A sale of CSC would have been the largest leveraged buyout since Dell went private for $16 billion in 2013.

In the most recent quarterly earnings report, CSC CEO Mike Lawrie cited "execution missteps" as for the company missing its revenue estimates. What’s more, CSC has been hit by a number of high-profile executive and senior management departures in the last 18 months.

CSC's Global Vice President of Cloud Computer and Software Services Siki Guinta left the company in late 2013. She had been in her position for three years. Similarly, Leif Ulstrup, vice president and general manager of Business Services for the Public Sector division left CSC in March of 2014 after five years with the company in multiple executive roles. Last August, Sam Visner departed after serving as vice president and general manager of Cyber Security for almost seven years to take the same position at ICF International.

Caucis of Technology Business Research views the departures of Guinta and Visner as most notable based on the vision CSC CEO Lawrie shared when he joined the company three years ago.

"Why are those two individuals key?" Caucis questioned of the departures of Guinta and Visner. "When CSC revamped its business strategy a couple years ago, [CEO] Mike Lawrie said we're going to underpin our entire portfolio with two things: cloud and security. Within the last year and a half, [their lead cloud and security executives] have both left the company ... maybe that is a better indication that all is not well with CSC."

Caucis said that the reorganization of the company under Lawrie has been successful in some areas, but has not turned the corner in terms of growth.

While the increase in focus that comes from a split may be helpful in the eyes of some, analysts said it will not cure all that ails CSC.

Gard Little, an analyst for Framingham, Mass-based market research firm IDC, said that even with a split CSC has the uphill challenge of transitioning to the subscription-based cloud model.

"Going forward, they need to accelerate the transition of its sales and delivery organizations to this new business model of cloud-based services," he said. "They've got to sell more of those types of projects. It's very challenging, but this is something all the industry participants are facing so it's not a unique challenge."

PUBLISHED MAY 18, 2015