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HPE to face lawsuit for allegedly misleading DXC investors

Failed to persuade a judge to ditch legal spat this week

HPE looks set to face a lawsuit claiming it misled investors about employee layoffs relating to the spin-off of its enterprise services business, after a judge declined to dismiss the case.

The legal action relates to IT giant HPE shedding the HPE Enterprise Services division in 2017 to merge it with rival technology consulting operation Computer Sciences Corporation (CSC), in a move that would lead to the creation of DXC Technology.

Investors filed a class action lawsuit in 2019 claiming that HPE had issued misleading statements about post-merger planned layoffs. These had indicated that the company would make savings through workforce optimization, such as by elimination of duplicate roles resulting from the merger.

However, the investor lawsuit contends that it instead proceeded to lay off many of the company’s most experienced and highly paid employees in order to make cost savings, inflate its apparent financial performance and boost its stock price.

HPE and its legal team had tried to argue that the plaintiffs in this action had failed to demonstrate a sufficient claim regarding any misleading statements, according to Bloomberg, but California Superior Court Judge Sunil R. Kulkarni instead found investors had put forward sufficient support for their claims that the company had misled them.

The case asserts liability against HPE and DXC, and “certain current and former officers and directors of HPE, DXC, and CSC” under the US Securities Act of 1933.

In the original filing [PDF], the plaintiffs claim that documents relating to the merger promised “first-year synergies of approximately $1.0 billion post-close, with a run rate of $1.5 billion by the end of year one”, which would be delivered by “benefits from expected economies of scale such as volume discounts as well as cost synergies expected from workforce optimization such as elimination of duplicative roles and other duplicative general, administrative and overhead costs.”

It is also claimed that investors were told that the combination of the two complementary businesses would “create one of the world’s largest pure-play IT services companies” which thanks to its unique position would be expected to have “annual revenues of $26 billion and more than 5,000 clients in 70 countries.”

But the filing states that the merger literature downplayed the cost reduction part of the turnaround plan, and that it claimed the post-merger DXC would be able to attract and retain highly motivated people with the skills necessary to serve their customers.”

And while this version of the post-merger plan was being presented to investors, the filing asserts that Defendant Lawrie (former DXC and CSC CEO Mike Lawrie) had his own internal forecasts that presented a different picture - a planned workforce reduction worth $2.7 billion in the first year alone, nearly three times the $1 billion of total “synergies” that investors were informed of.

The plaintiffs claim that the impact of these cuts and firings was that DXC was left without the resources to deliver on its client contracts, leading to a decline in client satisfaction, and that the financial metrics offered to them in relation to the merger were therefore “false and unrealistic”.

Lawrie stepped down in 2019, shortly before DXC reported huge losses in its Q2 results for that year, leaving the new CEO Mike Salvino scrambling to pick up the pieces and with the company admitting that years of redundancies had come home to roost.

According to Bloomberg, HPE’s legal representatives will be offered the chance to contest the ruling, and the judge also left the door open for them to file a new request to dismiss the investors’ case.

We reached out to HPE and DXC for their response to the case. HPE refused to comment at this stage, and we are awaiting a response from DXC. ®

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