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Hewlett Packard Enterprise will spin off its troubled services business in an $8.5 billion deal

This finally puts to rest one of then-CEO Mark Hurd's biggest and most disastrous acquisitions.

Hewlett Packard Enterprise CEO Meg Whitman Photo by Andrew Burton/Getty Images

Six months after the Silicon Valley stalwart Hewlett-Packard split into two companies, one half announced a surprise plan to split yet again.

Hewlett Packard Enterprise said it will spin off its long-troubled services unit and merge it with the IT services firm CSC in a deal worth about $8.5 billion.

The complex deal, in which HPE will combine its $20 billion Enterprise Services unit — accounting for more than one third of HPE's 2015 revenue — with CSC into a combined company of which HPE shareholders will end up owning about half.

The total consideration of the deal includes the creation of $4.5 billion of new shares, a cash dividend worth $1.5 billion, and the transfer of about $2.5 billion in debt and other liabilities off HPE's books and into the new company. HPE also expects to trim its operating costs by about $1 billion as a result of the spinoff.

What will remain at HPE is a leaner $32 billion company that leads the world in sales of servers, the computers that are stacked together in data center racks that power the Internet. It competes with networking giant Cisco Systems in selling gear for corporate networks, with EMC in data storage gear, and also sports a small software business that did about $3.6 billion in sales last year.

Mike Lawrie, CSC's current CEO, will be chairman and CEO of the new company. HPE CEO Meg Whitman, who engineered last year's split, will take a seat on the new company's board.

In an interview with Recode, Whitman called the deal with CSC a move that "unlocks a lot of value for our shareholders and our employees."

"The standalone HPE will be a faster-growing company that's intensely focused," she said. "With the spin-off we're creating two companies that are stronger and more focused and able to innovate faster than before."

A key aspect of Whitman's restructuring plan involved moving personnel out of high-cost labor markets in the U.S. and Europe and into lower-cost labor markets. According to a plan that Whitman unveiled last fall, 60 percent of HPE's services personnel would by 2018 be replaced by new workers in offices in Costa Rica, The Philippines, Bulgaria. and India.

Whitman said that plan remains unchanged by the spin-off. As of this quarter 47 percent of HPE's services personnel are in those low-cost markets, up from 32 percent a year ago, she said.

HPE shares rose by more than 10 percent in after-hours trading once the news was announced. Shares of CSC, formally known as Computer Sciences Corp. rose by more than 24 percent after hours.

The new company will boast annual revenue of about $26 billion from some 5,000 clients in 70 countries. For Whitman and HPE it will also solve one of the biggest problems associated with the turnaround plan that Whitman undertook in 2011 when she agreed take over as CEO after the short but disastrous run of her predecessor, Léo Apotheker. The new company will begin operating independently in March of 2017.

CSC posted annual revenue of $12.2 billion in the year ending April 3, 2015. Its business is split in three units, each sporting about $4 billion in annual sales. One unit specializes in software and IT consulting, another in re-selling public cloud offerings like Amazon Web Services and Microsoft Azure to corporate customers while a third specializes in handling the IT needs of U.S. federal government agencies including the Department of Defense.

The new company — HPE and CSC are calling it Spinco for now — will be a pure player in the low-margin, IT outsourcing market that had been a shrinking, expensive weight around the old HP's neck during the time it was struggling to bounce back. Revenue in the unit has declined for several years, during years that its customers went through wrenching changes in how they purchase and consume technology.

The move will also unwind what in hindsight has turned out to be one of the worst acquisitions in the old HP's history, the $14 billion acquisition of the IT services firm EDS, consummated in 2008 under yet another prior HP CEO, Mark Hurd, now the CEO of Oracle.

News of the spinoff came as HPE also announced earnings for its second fiscal quarter. It posted a per-share profit of 42 cents on revenue of $12.7 billion more or less meeting the expectations of analysts. Revenue rose 1 percent — the first time in about five years — and would have risen by about 5 percent after adjusting for the effect of currency exchange rates. The company also said it will spend up to $3 billion for share buybacks. Its board had already authorized about $5 billion before today.

HPE's main business unit, the Enterprise Group posted revenue of $7 billion, up 7 percent from the same period a year ago, or 10 percent after accounting for currencies. The services unit — the one being spun off — posted revenue of $4.7 billion for a decline of 2 percent or up 1 percent after adjusting for currencies. Software sales fell 13 percent year-on-year to $774 million, but grew slightly after adjusting for the sale of a some portions of the business like Tipping Point, which Trend Micro bought last year for about $300 million.

Speaking on a conference call, Lawrie said that HPE and CSC have only a small overlap in their base of large clients, saying they share less than 15 percent of their largest customers.

The deal with CSC is also the latest evolution in a string of deals in the IT services business. In March privately held Dell sold its own services unit, the company formerly known as Perot Systems to Japan's NTT for about $3 billion.

Independent of the spin-off and merger, HPE exited the quarter with about $9 billion in cash. Speaking on a call, Whitman said that HPE remains open to new acquisitions, but not large ones. Last year it spent $3 billion to acquire Aruba Networks, a company that specializes in corporate WiFi gear.

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