Recycling value

Meg Whitman sullies good deal with fuzzy math

Meg Whitman is letting fuzzy math sully an otherwise clever deal. The chief executive of Hewlett Packard Enterprise plans to hive off and merge its IT services business with rival Computer Sciences. HPE is touting a combination of cost cuts and other benefits worth almost $14 billion today. A rough Breakingviews calculation suggests potential value creation of a little over half that - and even that may be generous.

HPE, the corporate computing arm that was spun out of Hewlett-Packard last year, is effectively shedding what's left of Electronic Data Systems. That's the IT services company which former HP boss Mark Hurd bought in 2008 for nearly $14 billion. HP wrote down the value of its services business by $8 billion four years later. The unit logged some $20 billion of revenue last year, but only made about $1 billion of operating profit before special items.

Whitman has dressed the deal up well. HPE shareholders will receive a $1.5-billion dividend. And because the deal is structured as a so-called Reverse Morris Trust, HPE's shareholders will be handed their 50 per cent share of the new company without having to pay any tax. The new entity will also assume around $2.5 billion of debt and other liabilities from HPE - half of which will be supported by CSC shareholders.

In addition, HPE stockholders will get half the value of what the company estimates will be at least $1.5 billion of annual cost cuts from the merger. These would be worth $5 billion once taxed and capitalised by a multiple of 10.

Then, though, HPE's pitch starts getting wobbly. Whitman's company appears to be arguing that at least some of HPE shareholders' implied $4.5-billion equity stake in the new company, for instance, is value creation - when it's really just a transfer.

The numbers also arguably take an optimistic view of a sector that has been struggling for some time. HPE has managed to cut costs in recent years to offset falling revenues in its services business. But if the woes continue, that could be difficult to sustain.

HPE has not yet convinced its owners. The stock jumped 11 per cent in after-hours trading on Tuesday, adding just over $3 billion. That's not a bad salvage operation - but it's a far cry from what Whitman and her executives are pushing.