HP Enterprise unit's merger with CSC no shield from cloudburst

Wed May 25, 2016 3:04pm EDT
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By Narottam Medhora and Anya George Tharakan

(Reuters) - Hewlett Packard Enterprise Co's (HPE.N: Quote) planned merger of its struggling IT services business with Computer Sciences Corp CSC.N could generate considerable savings, but it won't stop customers from defecting to cloud services.

The merger, which will result in a company with annual revenue of about $26 billion, brings together HP's clout in the pharma and transportation industries and CSC's heft in the insurance, healthcare and banking sectors.

The deal will create the world's third-largest IT service provider at a time when traditional IT players such as IBM Corp (IBM.N: Quote) and Accenture Plc (ACN.N: Quote) are struggling to keep pace with the likes of Amazon.com Inc (AMZN.O: Quote) and Microsoft Corp (MSFT.O: Quote), which provide cloud-based computing services at much cheaper rates.

"While CSC mentioned scale as a big part of the rationale, we're not convinced as to why being bigger in a declining end-market is a good thing," Citi Research analyst Ashwin Shirvaikar said in a broker note.

Spending on enterprise, non-cloud, IT infrastructure will fall by 4 percent this year, but will still account for nearly two-thirds of global IT services spending, according to research firm IDC.

IDC expects spending on private cloud IT infrastructure to increase 11 percent to $13.9 billion, and spending on public cloud services to jump 14 percent to $24.4 billion.

CSC's shares jumped 35 percent on Wednesday - their biggest percentage gain in a day - to a record high of $48.27.

The median price target on the stock is $39.   Continued...

Signs for Hewlett Packard Enterprise Co. cover the facade of the New York Stock Exchange November 2, 2015. REUTERS/Brendan McDermid