CSC + HPE – DXC

The spin-off investment strategy has beaten the S&P by an average of 10% per year over the last decade. Timely tips from our spin doctor...

DXC Technology, the corporate mash-up between Computer Sciences Corporation (CSC) and HPE Enterprise Services closed its first official day of trading at $67.95 per share on April 4.  

DXC Technology (DXC) is a global technology company formed from the merger of CSC and Hewlett Packard Enterprise’s (HPE) Enterprise Services division in a “Reverse Morris Trust” spin-off. 

DXC Technology, the world’s leading independent end-to-end IT services company was added to the S&P 500 index with a market cap of $19.3 billion. DXC is expected to generate $26 billion in annual revenue. The company will have 85 delivery centers and 95 data centers servicing more than 5,000 clients speckled globally across 70 countries. 

Last May, HPE announced the spin-off of its Enterprise Services business, and its subsequent merger with CSC. The deal created a company with the requisite scale, expertise and leadership to catapult it amongst the world’s largest pure-play IT services companies. Shareholders of CSC received one share of DXC for each share of CSC. HPE shareholders received 0.086 shares of DXC for each share of HPE owned.

HPE shareholders will retain a stake in HPE as well as a 50.1% interest in DXC. CSC shareholders hold the remaining 49.9% ownership.

The spin-off and merger is tax-free to shareholders of both companies.

We value DXC at $22.6 billion or $80 per share using a 9.7x FY17 EBITDA multiple. This suggests 18% upside from the first-day closing price of $67.95 per share. We value DXC at $22.6 billion, or $80 per share.

Spin cycle: In our April issue (out March 1), we highlighted the Spin-off of Yum Brands (YUM), Chinese affiliate (YUMC) providing a bullish outlook on the spin. On April 6, YUMC spiked 12% after an earnings-per-share beat.