Whitman deletes another chapter in HP history as CSC and ES borg

Services basketcases cling together = bigger basketcase

Hewlett Packard Enterprise CEO Meg Whitman is dismantling another legacy bequeathed to her by a predecessor as she waves goodbye to Enterprise Services.

The first lady of Palo Alto has already closed the chapter opened by one-time CEO Carly Fiorina who had signed off the buy of Compaq, only for HP's PC business to be ejected along with printers last November in the creation of HP Inc.

Now the slurp of EDS by playboy ex-exec Mark Hurd, who in left in 2010, is being erased. Some onlookers think Whitman is making the right choice, though it largely leaves HP as a maker of infrastructure tech tin.

Enterprise Services was a “millstone around the neck of the company”, said Canalys chief analyst Alastair Edwards. “Buying it was a mistake, a mis-reading of where the market was headed.”

It certainly seemed so back in 2008 when HP paid $13.9bn for EDS - it would later write down the value of the business by $8bn in summer 2012.

Edwards said the old HP was trying to emulate IBM, which had built a hefty professional services and outsourcing business - areas that are now causing Big Blue some pain.

The writing was on the wall when the credit crunch happened - large enterprises wanted fewer mega outsourcing contracts, and were opting for bite-sized, shorter-term managed services deals, he said. There were some exceptions to the rule - Deutsche Bank and TNT spring to mind.

“HPE ended up with a low-growth [services] division that lost business to more flexible competitors,” said Edwards.

ES suffered embarrassing shrinkage in sales and profits, forcing Whitman to embark on four years of cost cutting, including mass redundancies and programmes to restrict travel, overtime, etc. Morale tumbled among the teams impacted.

The top and bottom lines have been recovery mode for ES over the past twelve months, so it is perhaps surprising HPE will only realise some of the benefits of that cost cutting as the services business comes together with CSC, company that has also faced huge pressures in recent years and has hived off bits of the organisation into separate entities.

The deal, due to close next March, will create a $26bn revenue “pure play services powerhouse” - Whitman's words, not ours - with more than 5,000 customers on the books in 70 countries.

The main $8.5B value of the deal is made up of $4.5B in stock exchange resulting in HPE shareholders owning 50 per cent of the new company, a $1.5B cash dividend, and $2.5B in debt and other liabilities. The $2.5B debt and other liabilities is made up of $1.9B of HPE debt and $0.6B of net pension liabilities.

The borg's brand has yet to be determined or at least made public. Whitman will serve on the board of the combined entity and ES boss Mike Nefkens will partner with CSC CEO Mike Lawrie but his exact role is yet to be detailed.

Around $1.5bn of “synergy savings” post closure of the merger are forecast by both companies. Staff are braced for change.

“In the medium term this merger looks likely to be good for investors and management but there will be huge job cuts,” predicted one worker.

Company sources at both HPE and CSC questioned if the level of redundancies made over recent years have impacted their ability to deliver on services commitments by leaving them short of manpower or skills.

Wall Street analyst Toni Sacconaghi, senior research analyst for IT hardware at Bernstein, said the “strategic rationale makes sense” as HPE and CSC are “relatively weaker ITO players, in a flat to declining market”.

“Whilst we do worry about the potential loss of HPE hardware sales bundled with services agreements, we note that HPE and CSC entered in a three-year agreement to ensure no loss of HPE product attach.”

He said the services spin-off means the remaining HPE will be “much more transactional – and arguably – more vulnerable to margin pressure… particularly as customers move deployments from on to off-premise”.

The extraction of services leaves HPE with annual revenues of roughly $33bn.

Carving out the division will help to reduce channel conflict for HPE - resellers and distributors account for 70 per cent of the company’s revenues.

ES competed at the high end of the market, selling to large enterprises, but it was perceived as a competitive threat by some in the channel.

The move frees HPE to be a technology company, Computacenter boss Mike Norris told us. “This is the right thing for HPE in my opinion, as a channel partner it provides clarity and simplifies our relationship which has to be good news.”

Computacenter is one of HPE's biggest partners across Europe so it should know.

Krista Macomber, senior analyst for data centre analyst TBR, agreed the services merger will let HPE “execute in a more concentrated manner on converged and software-defined data centre opportunities from an infrastructure standpoint”.

But she warned this could also create “hurdles” because customers have sought upfront advisory support when modernising IT and are keen to adopt "as-a-service” delivery.

“TBR research indicates that data centre customers turn to HPE for more than turnkey appliances, working with the vendor on broader consulting and enablement in support of widespread IT transformation that spans on premises and off-premises resources, as well as pre-sales consulting.”

This in turn means more goodness for channel partners and service providers as HPE tries to avoid “missteps in execution” by leaning on them more to support customers.

Services were supposed to give tech vendors a bigger and better future, but HPE's merger with CSC and Dell's sale of Perot Systems, coupled with IBM's troubles indicate this line of thinking was wrong.

Whitman is nearing the end of her five-year timeframe to turnaround the company, and has certainly made big bets like the previous three CEOs. But these mostly involved spinning off or selling businesses. ®

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