CSC announced it is splitting into two companies. One will provide service to commercial and government organizations worldwide; the other will serve the U.S. public sector businesses. What are the implications for the services industry?
CEO Mike Lawrie has been running CSC’s turnaround. The story line he drove was that he would first drive earnings and then fix growth. He has been spectacularly successful in driving earnings, but the pivot to growth hasn’t worked so well.
Certainly there were rumors that CSC was up for sale, but it didn’t transpire. We believe this split into two entities is the natural next step, especially since it comes at a time when the industry is maturing. The separation allows CSC to behave differently.
Everest Group believes the federal component will become an attractive acquisition target with both defense contractors and private equities interested in the consistent cash flow and book of business.
The commercial side may also attract interest, but from a different group. Certainly there has long been speculation that one or more Indian-based service providers may have an interest in acquiring CSC’s infrastructure-based business. It would be a large acquisition with substantial adjustments as the Indians move the book of business to their labor arbitrage model.
For both of the new entities, whether they are acquired or remain independent, the split should allow them to focus more strongly on growth at time when growth is coming at a premium.