Australian government agencies are facing a rapidly shrinking choice of domestic and international technology outsourcers after HP Enterprise Services announced a US$8.5 billion proposed merger with veteran player CSC, a deal that will see a new entity spun out separately from both companies.
Revealed to Australian customers on Wednesday morning, the two fading giants have told customers and shareholders they expect the merger deal to be completed by March 2017 to create what is being sold as a “strategic combination of the two complementary businesses” that is anticipated to have annual revenues of US$26 billion.
Under the proposed new structure both CSC and HP Enterprise Services will have equity “approximately 50 percent of shares” each, with CSC’s Mike Lawrie to become the chairman, president and chief executive of the new company, while HP Enterprise Services’ boss Meg Whitman will join the board.
The deal is still subject to regulatory and shareholder approval.
A major question that dozens of Australian customers are certain to be asking is what impact the transaction will have on healthcare software provider iSoft, which CSC acquired in an acrimonious on-market takeover for $460 million in 2011 that was doggedly fought by the then ASX-listed company’s head, Gary Cohen.
iSoft’s customers in Australia include multiple large health services in New South Wales, Victoria, Queensland, the Australian Capital Territory, South Australian and Western Australia.
Although the iSoft brand name is not specifically named in the announcement, Government News has been told by CSC that the health applications provider is definitely part of the merger and spin out as it has been fully integrated into CSC for more than four years.
Also in the merger mix are government and corporate customers of former Australian IT services company UXC, which CSC acquired for $428 million in October 2015, will also be contemplating the news that their provider will undergo its second change of owner in just over 6 months.
UXC’s stated public sector customer list includes the Australian Securities and Investments Commission, the federal Department of Industry, Innovation, Science, Research and Tertiary Education (DIIRSTE), Queensland Health, Transport for NSW, the Department of Defence and the Department of Human Services.
The latest mega-transaction in what has become a challenged market for IT services comes as big players, including HP Enterprise Services and CSC, have been hit hard by successive waves of margin sapping technology consolidation, a trend that has included the rise of lower cost cloud computing and a proliferation of mobile devices that have decimated once dominant desktop and server markets.
Formed following a the sale of Electronic Data Systems to Hewlett Packard in 2008 for US$13.9 billion, HP Enterprise Services never managed to regain the market share or customer footprint that was typified by big cluster or whole-of-government deals that often nudged the billion dollar mark and spanned periods as long as a decade.
The extent of shrinkage and low margins in the outsourcing market was sharply underscored when Lockheed Martin departed the Australian public sector IT outsourcing market last year after initially making strong inroads at key customers including the Australian taxation Office.
Meanwhile, Mr Lawrie and Ms Whitman (who was once CEO of eBay) are keenly selling the deal as a good thing for clients.
“Our proposed merger with HPE Enterprise Services is a logical next step in CSC’s transformation,” Mr Lawrie said in the announcements.”
“Clients are feeling the pressure to digitally transform their enterprises to meet new business demands and customer expectations. They need a partner with the innovation, scale, leadership and dependability to answer the challenge.
“As a pure play, the combined company will be built to lead digital transformations using next-generation technology solutions from both companies,” Mr Lawrie continued before unbolting any connection to the former server monolith.
“It will be able to operate independent of any single hardware provider, while partnering with the world’s leading technology providers, including HPE.”
Meg Whitman was equally optimistic.
“The ‘spin-merger’ of HPE Enterprise Services with CSC is the right next step for HPE and our customers,” Ms Whitman said.
“As two companies with global scale, strong balance sheets and a focus on innovation, both HPE and the new company will be well positioned as leaders in their respective markets.”
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