HP Enterprise to merge IT services unit with Computer Sciences

The move will allow the company to focus on cloud services business and other fast-growing units

Hewlett Packard Enterprise Co said it would spin off and merge its struggling IT services business with Computer Sciences Corp , allowing the company to focus on its cloud services business and other fast-growing units.

Shares of Hewlett Packard Enterprise, formed after Hewlett-Packard Co formally split in November, rose 10.5% in extended trading on Tuesday.

Falls Church, Virginia-based Computer Sciences' shares jumped 19.5% to $42.60.

Under Chief Executive Meg Whitman, Hewlett Packard Enterprise has been restructuring its IT consulting and services group.

The company sold at least 84% of its 60.5% stake in Indian IT services provider Mphasis Ltd to Blackstone Group for $1.1 billion in April.

HPE is expected to have $33 billion in annual revenue after the spinoff and will concentrate on its remaining enterprise group that includes its cloud services business and makes servers, routers and switches.

Revenue from the enterprise group business rose about 7% to $7.01 billion in the second quarter ended April 30, from a year earlier, on a constant currency basis.

However, revenue from the enterprise services business, which the transaction values at about $8.5 billion after tax, fell 2% at $4.7 billion year-over-year.

The enterprise services business fell 6% year-over-year in the previous quarter.

HPE, which houses the former Hewlett-Packard Co's corporate hardware and services division, said the merger of the two businesses is expected to produce cost synergies of about $1 billion in the first year after close, expected by March 2017.

Computer Sciences Chief Executive Mike Lawrie will become chairman, president and CEO of the new company, 50% of which will be owned by HPE shareholders. Whitman will join the board of the new company.

The new company's board will be split evenly between directors nominated by HPE and CSC.

HPE expects $900 million in separation charges regarding the merger, of which $300 million will be recorded in 2016, Chief Financial Officer Tim Stonesifer said on a conference call with analysts.

HPE, which also added $3 billion to its share buyback, said total revenue rose 1.3% to $12.71 billion in the second quarter. Analysts on average had expected $12.33 billion, according to Thomson Reuters I/B/E/S.

Goldman Sachs & Co is serving as financial adviser to HPE, while RBC Capital Markets is serving as financial adviser to CSC.