The merger between HP Enterprises' (HPE) services business and Nasdaq-listed Computer Sciences Corporation (CSC) will create a pure-play IT services powerhouse with outsourcing revenues higher than that of Accenture's (sans its consulting business) and one that will be better positioned to compete against the formidable Indian IT companies.
The new entity is expected to have $26 billion in combined revenues that includes CSC's $8 billion and HP Enterprise's $18 billion services business. And over 40% of the workforce of the combined entity will be based out of India - that's about 55,000 employees, including HP India's 30,000 and CSC India's 25,000).
Peter Bendor-Samuel, CEO of US-based Everest Research, said the merger makes sense for both sides, allowing HP to exit a shrinking and troubled space while allowing CSC to build scale and wring profits from the same space. "In the meantime, HP/CSC must overcome the distractions of the merger and carefully manage the impact of its customers, potentially further advantaging the Indian firms as they seek to continue to take share away from both firms," he said.
Indian IT services companies have been steadily taking share away from their global counterparts, thanks to their significantly better cost structure, made possible by use of large numbers of fresh college graduates, a better offshore-onsite mix of employees, and the use of a shared services model under which it uses the same resources for multiple clients. Most of the leading Indian IT firms have operating margins between 20% and 25%, while global firms' margins are well below 20%, with some European ones having margins of under 10%. Analysts say that the new CSC-HP entity will have the scale, resources and focus necessary to move closer to this model and combine that with its own traditional strengths to challenge the Indian IT majors.
Dell did something very similar in March, when it sold its IT services business to Japanese IT major NTT Data for $3.05 billion. This combined entity globally has over 1 lakh professionals, with about a third of them in India.
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SEE ALL COMMENTSADD COMMENT For CSC, the architect of the deal is Mike Lawrie, the chairman, president and CEO who has dramatically turned around CSC since he took over in 2012. That's clearly giving a lot of confidence to investors, reflected in the sharp increase in the CSC share price following the deal. Lawrie has made a series of acquisitions and built partnerships with companies including Amazon Web Services, AT&T, SAP, Workday and HCL Technologies to go-to-market in the shortest possible time instead of building capabilities ground up. "He even created a two-in-a-box approach, marrying engineering and business personnel, that has really helped," said an industry executive who did not want to be named.
But some analysts are cautious. "HP, to put it mildly, has bungled previous attempts at amalgamating large acquisitions such as the EDS integration which resulted in lost customers and talent, and wiped out a large chunk of business that almost collapsed the services business," said Hansa Iyengar, IT analyst in London-based Ovum Research. "There is also bound to be a lot of confusion and scepticism in the market that the new entity will have to address by putting out a consistent message around its positioning, value-add, and strategy."