Hewlett-Packard agreement: “Just a story of financial engineering”




The company that invented Silicon Valley is shrinking again. Hewlett-Packard Enterprises Co. announced Tuesday evening that it was selling its technology services business to Computer Sciences Corp in an $8.5 billion deal.

Hewlett-Packard is the original “garage-started” company: Stanford graduates Bill Hewlett and Dave Packard literally started the company in 1938 in a garage in Palo Alto, California (the garage is now a Registered Historic Site), at a time when the region was famous for its products, not its technology. He became a giant over the following decades. When CEO Meg Whitman came on board in 2011, the company had $127 billion in revenue and 350,000 employees.

Times are changing however and the giant has turned into a heavy giant. Last fall, he finalized the split of the company into two parts, trying to stay relevant in a rapidly changing technology landscape. Now he separates another important part of it. After this deal with CSC, the remaining Hewlett-Packard businesses will be a company with approximately $33 billion in revenue and 50,000 employees.

While not trivial, the deal raises fundamental questions about the direction of Hewlett-Packard. For now, however, investors are happy: HP shares are up 9% and CSC shares are up 34%.

Here’s what The Street had to say about the latest deal:

– Abhey Lamba, Mizuho Securities (neutral rating, target price of $13): In order to achieve synergies in the business services sector, the company is combining its assets with CSC while offering 50% of the shares of the combined entity to existing HPE shareholders. The split will be completed by March 2017 and HPE shareholders will receive $8.5 billion in stock, dividends and reduced liabilities. Management expects synergies of $1 billion in the first year, which we believe is very aggressive and may be difficult to achieve.

We believe HPE will likely continue to work on returning more cash to shareholders, which should support the stock around current levels. The split makes the business of the business more transactional, which introduces increased risk over time. We remain on the sidelines as we see no fundamental reason to get involved despite the low valuation.

-Brian Alexander, Raymond James (market performance, no target price): while HPE shareholders will own 50% of the combined company, it sells at a time when [Enterprise Services] revenues were finally stabilizing and margin expansion was ahead of plan. Despite this, we estimate the implied valuation of the transaction to be less than 5 times our FY2017 EBITDA estimate, the timing has been attributed simply to the desire to be at the forefront of the consolidation of the industry, and there is no clear next step for the additional HPE cash acquired under the deal. .

Instead, shareholders are left with a hardware company that just saw a double-digit decline in dollar operating income on 7% revenue growth, and a software portfolio where revenue declined for eight consecutive quarters. Given the cost synergies assumed from the ES divestiture, we believe HPE shares could rise $1.50-$2.00. However, we suspect the core business will be less competitive on its own and view this as just financial engineering.

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