A Channel Force Arrives: DXC Technology Born From Close Of CSC-HPE Enterprise Services Merger

Mike Lawrie and DXC Technology execs celebrate at the opening bell.

DXC Technology officially opened for business Monday with 170,000 employees and $26 billion of annual sales after CSC closed its merger with HPE Enterprise Services.

DXC Chairman, President and CEO Mike Lawrie is slated to the opening bell at the New York Stock Exchange Monday to commemorate the creation of the world's third largest solution provider. This culminates a 10-month process to bring CSC and HPE Enterprise Services together and focus the combined entity on stabilizing revenue, next-generation talent, and driving digital transformation.

"With the successful close of our transaction, we are standing up a company that is ideally suited to meeting the needs of a rapidly changing technology marketplace," Lawrie said in a statement. "We are looking forward [to] delivering on our promise of producing greater value for clients, partners and shareholders, along with growth opportunities for our people."

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The company said it has a series of global launch activities beginning this morning, including employee events at more than 150 sites and an inaugural advertising campaign to introduce the new company to the marketplace. The merger of CSC and HPE Enterprise Services was completed Saturday, the company said, and announced before the market opened Monday.

All outstanding shares of CSC common stock have been cancelled and converted into shares of DXC Technology. Some 50.1 percent of DXC's stock was issued to HPE stockholders (valued at approximately $9.5 billion), while the remaining 49.9 percent was issued to CSC stockholders.

Tysons, Va.-based DXC's stock opened its first official day of trading at $69.20 per share. DXC will replace Southwestern Energy on the prestigious S&P 500 stock market index, with Southwestern taking CSC's old spot on the S&P MidCap 400 index.

HPE said it has agreements in place with DXC to support current customers and grow business over time, but also plans to begin building valuable new partnerships with other leading IT services companies. HPE President and CEO Meg Whitman will also sit on DXC's board of directors.

"The close of this transaction leaves HPE with a crystal clear mission, tied directly to the solutions our customers and partners tell us they want most," Whitman said in a statement. "I am also particularly proud that this transaction will deliver approximately $13.5 billion in value to HPE and its shareholders, which is almost sixty percent higher than when it was first announced last year."

Palo Alto, Calif.-based HPE said that services remain core to the company's strategy. The company plans to continue investing in Pointnext, its technology services organization that draws on the expertise of more than 25,000 specialists in 80 countries to support customers across advisory and transformation services, professional services and operational services.

Pointnext will support businesses around the adoption of emerging technology such as cloud computing and hybrid IT, big data and analytics, and the Intelligent Edge and Internet of Things (IoT), according to HPE.

The transaction will deliver $13.5 billion in value to HPE shareholders, according to the company, through an equity stake in DXC for HPE shareholders, a cash dividend payment to HPE and DXC's assumption of debt and other liabilities. As a result of the transaction, HPE received a special $3 billion cash payment, and DXC assumed $600 million of net pension liability and $400 million of existing debt.

DXC is trying to turn around the middling fortunes of CSC and HPE ES through heavy investment in emerging technologies and a series of tuck-in acquisitions. Lawrie told investors Wednesday that the CSC and HPE ES brands "were sort of tired," with CSC being "'me too' for a lot of years" and HPE ES being "a captive channel distribution for technology."

The company expects revenues of $24 billion to $24.5 million in its first year of operations, which will end in March 2018, and overall revenue growth of 1 percent to 4 percent through 2020. But there's great variance in the projected performance of DXC's major business groups in the next three years.

DXC traditional IT business – which currently accounts for three-quarters of the company's headcount – is expected to decline by 4 percent to 7 percent annually due to productivity gains, dis-synergies and shifts to digital technologies. Just half of DXC's employees will hold traditional IT roles by March 2020, the company said.

The industry-focused and business process services work of DXC is expected to grow by 7 percent to 10 percent as the company leverages its intellectual property and expertise to capture share in high-growth industries. About half of DXC's clients sit in five digital-intensive industries: healthcare, banking, energy, travel/transportation, and insurance, where DXC is the top provider of software and services globally.

Digital, which is DXC's smallest sector today, is expected to enjoy annual growth rates of 25 percent to 30 percent thanks in part to CSC's $500 million investment in digital offerings over the last two years. DXC today employs: 20,000 Microsoft professionals; 5,000 certified workplace engineers; 4,000 security professionals; 3,500 data scientists/analysts; and 1,000 Amazon Web Services professionals.

The two companies that came together to form DXC had divergent performances in their most recent quarters. Sales for HPE Enterprise Services fell by 11 percent to $4.04 billion, with IT outsourcing revenue declining 8 percent to $2.64 billion and applications and business services sales plummeting by 17 percent to $1.4 billion.

CSC, meanwhile, saw sales in its most recent quarter climb 10 percent to $1.92 billion, with its Global Business Services (GBS) division seeing sales skyrocket by 18.1 percent to $1.05 billion thanks to business process services offerings and recent acquisitions. Global Infrastructure Services (GIS) saw revenue tick up 0.8 percent to $871 million due to next-generation offerings and recent acquisitions.

DXC told investors that it plans to expand its digital offerings by executing targeted, tuck-in acquisitions that will account for 1 percent to 2 percent of revenue growth by 2020. Wider margins will create the capital necessary to invest more in digital offerings, the company said.

DXC has some 6,000 clients worldwide, including more than 200 of the Fortune 500. The company believes it can upsell those clients in areas such as workload migration, new workloads, application migration, cybersecurity, big data and mobility.

The company expects to achieve $1 billion of cost savings in its first year, with 70 percent of that coming from workforce optimization measures and finding supply chain efficiencies. Those two areas are expected to drive $1.85 billion of a projected $2.25 billion in cost savings, with 15 to 20 percent of those savings slated to be re-invested in the business.

Other plans for streamlining the organization include cutting its 15,000 suppliers in half by 2020 and cutting about $9 billion from areas like contract labor and technology. In its supply chain alone, DXC is targeting $300 million in first-year savings and $750 million through 2020.

Some $100 million of DXC's projected first-year savings will come from streamlining its facilities and data center footprint. DXC plans to reduce the number of "in-country low-cost delivery centers" in its portfolio from 17 to eight while "most likely" adding a center in the United States, according to Lawrie.