Computer Sciences To Gain From HPE Deal, Time To Hold?

On Jun 27, 2016, we issued an updated research report on Computer Sciences Corporation (NYSE:CSC) .

Recently, CSC announced its decision to merge its business with Hewlett Packard Enterprise Company’s (NYSE:HPE) Enterprise Services business, which will be spun off from the parent company. This deal will bring together CSC’s strengths in insurance, healthcare and financial services along with HPE’s Enterprise Services expertise in industries like transportation, pharma, technology, media and telecom.

Post the merger, the combined entity will become the world’s second-largest IT services company after Accenture plc (NYSE:ACN) and generate revenues of approximately $26 billion. The company plans to generate cost synergies worth $1 billion in year one and a run rate of $1.5 billion exiting year one. We believe that the merger with HPE’s business will strengthen Computer Sciences’ capabilities, allowing it to become a leading player in the IT services domain.

Computer Sciences is currently focused on the cyber business, cloud computing and Big Data. A significant portion of the company’s cyber business is contributed by the federal government and, to an extent, by the commercial sector. Apart from this, the cloud computing business forms a major portion of the company’s business model. Clients increasingly prefer to rely on cloud-based services as it makes the IT system more agile and productive, which leads to considerable cost savings. According to Gartner, SaaS spending is estimated to witness 20.3% year-over-year increase in 2016 and will reach $37.7 billion from $31.4 billion in 2015. Computer Sciences, being a major player, is expected to benefit from this growth.

The company is also focusing on strategic partnerships to expand its share in the cloud computing market. For instance, the strategic partnership with AT&T (NYSE:T) where Computer Sciences’ cloud business infrastructure will be merged with AT&T’s cloud infrastructure. HCL had joined forces with the company to expand its core banking and card services solutions. The company has also entered into a partnership with Amazon (NASDAQ:AMZN) to develop cloud-based solutions for enterprise and public sector clients. Computer Sciences has also entered into a cloud partnership agreement with IBM (NYSE:IBM) and SAP as well. These alliances will increase Computer Sciences’ customer base and help in garnering additional revenues.

Computer Sciences has also made a few important acquisitions to build its product portfolio and stimulate growth. Acquisitions are central to the company’s growth strategy and help it to gain access to newer markets and technologies. Also, since intensifying competition is making the cloud computing and cyber security market tougher to penetrate, acquisitions have helped the company to boost revenues. Most recently, Computer Sciences signed a binding Scheme of Implementation agreement to buy out UXC Limited. Moreover, the company completed the acquisition of three companies last year – Autonomic Resources, Fruition Partners and Fixnetix. These acquisitions are expected to enhance the services offered by Computer Sciences to its global utilities clients and support its strategic presence in the Big Data business by providing a flexible and scalable platform-as-a-service offering. Moreover, the company’s continued acquisitions are expected to make a good contribution to its revenue stream.

Nonetheless, the market is becoming competitive with companies like CACI International Inc. (NYSE:CACI) and Accenture making their presence felt, which could hurt Computer Sciences’ top-and bottom line.

Currently, Computer Sciences has a Zacks Rank #3 (Hold).