Hewlett Packard Enterprise Co: Deals Can Make HPE Stock Soar

Hewlettt-PackardHewlett Packard Enterprise Co (NYSE: HPE) stock has been focused on executing its go-forward strategy to realize its vision to become a leading hybrid IT provider. The company also aims to achieve faster growth, higher margins, and free cash flow for HPE stock shareholders.

The board and management of Hewlett Packard Enterprise recently approved two separate spin-merger deals with Computer Sciences Corporation (NYSE: CSC) and Micro Focus International plc (LON: MCRO) as part of its efforts to achieve its goals.

Unlocking substantial value for HPE stock

Hewlett Packard Enterprise decided to spin off and merge its “Enterprise Services” business with Computer Sciences Corporation to create a $26.0 billion pure-play, global IT services company. The transaction would deliver approximately $8.5 billion in expected after-tax value to HPE shareholders through a stock-for-stock exchange.

The deal includes an equity stake worth over $4.5 billion in the newly combine entity, a cash dividend of $1.5 billion, and the assumption of $2.5 billion of debt and other liabilities. The investors in Hewlett Packard Enterprise would own shares of HPE stock and approximately 50% of the newly combined company after the closing of the deal, which is expected on March 31, 2017.  The estimated cost synergies would be around $1.0 billion in the first year of the merger, and a run rate of $1.5 billion by the end of year one. (Source: “Hewlett Packard Enterprise Announces Plans for Tax-Free Spin-Off and Merger of Enterprise Services Business with CSC,” Hewlett Packard Enterprise, May 24, 2016.)

Last week, Hewlett Packard Enterprise disclosed its decision to spin off and merge its non-core software assets with Micro Focus for $8.8 billion. The transaction would create the world’s largest pure-play software company with annual revenue of $4.5 billion.

Holders of Hewlett Packard stock will own American depositary shares (ADS), representing 50.1% equity stake in the newly merged company. The estimated value of the equity stake was approximately $6.3 billion, based on the closing price of Micro Focus on September 5. Hewlett Packard Enterprise would receive a cash payment of $2.5 billion before the closing of the merger. The transaction is expected to close in the second half of fiscal 2017. (Source: “HPE Accelerates Strategy with Spin-Off and Merger of Non-Core Software Assets with Micro Focus,” Press Release, September 7, 2016)

Meg Whitman, the president and CEO of Hewlett Packard Enterprise, said the spin-merger deals provide significant incremental value to shareholders of HPE stock. The company is expected to generate $28.0 billion in annual revenue after the completion of the transactions. It would be a stronger company with significant scale, a diversified world class portfolio, a global footprint, and a healthy balance sheet with $5.3 billion in operating net cash.

Following the separation of its Enterprise Services business and non-core software assets, Hewlett Packard stock’s incremental revenue growth would be 300 basis points, operating margins by 100 basis points to over 10% and free cash flow as a percentage of revenue would increase 50%.

HPE, CSC, MCRO Stock performances since spin-merger announcements

Since announcing its first spin-merger deal with Computer Sciences Corporation on May 24, HPE stock climbed $16.25 per share to its current trading price of around $21.16 per share; a gain of 30% or about $4.91 per share.

On the other hand, HPE stock dropped more than four percent since September 7 when the company announced its spin-merger deal with Micro Focus. Hewlett Packard stock still gained more than 29% value over the past six months, or 39% year-to-date. The company currently has $35.87 billion market capitalization.

It is also important to look at the stock performances of CSC and MCRO since HPE stock investors would own equity stakes, 50% and 50.1% respectively, in the newly combined companies: Computer Sciences Corporation plus HPE’s Enterprise Services and Micro Focus plus HPE’s non-core software assets.

CSC stock traded from $35.65 on May 24 to $45.83 per share, its closing price on September 13. The stock increased $10.18 per share or 28.5% since the spin-merger announcement.

CSC stock traded from $26.21 on September 14, 2015, to a final closing price of $45.83 on September 13, climbing over 74% over the past year. Its current market capitalization is around $6.54 billion. Since the beginning of this year, CSC surged more than 40%.

Wall Street analysts covering the stock are advising investors to hold their stake in the company based on their belief that CSC stock would jump as high as 37.5% to $63.00 per share over the next 12 months.

On the other hand, MCRO stock climbed from 1,955.00 pence per share on September 7 to 2,172.78 pence on September 13. The stock gained 217.78 pence per share, or 11.13%.

Micro Focus has been rewarding its investors with generous profits. The company’s shares rose more than 36% year-to-date or 77% over the past year. The company has a £4.95-billion market capitalization.

Some analysts are bullish on the future of Micro Focus based on its track record of delivering better-than-expected quarterly earnings and revenue. The company’s average earnings growth rate was 12.83%, and its average revenue growth rate was 35.43% over the past four quarters. MCRO is expected to outperform the market. In fact, the stock already surpassed Wall Street’s average target price of 1,827.18 pence per share.

The Bottom Line For Hewlett Packard Stock

Investors seemed impressed and happy with the leadership of Hewlett Packard Enterprise, particularly with their execution of its transformation strategy into a leaner, stronger, and faster-growing company with higher margins and free cash flow.

The spin-merger deals unlocked tremendous value for HPE stock shareholders, and they would continue to enjoy further rewards going forward. Take note that the company’s shareholders would own 50% of each of the merged entities, which are expected to deliver strong financial and stock performance. Investors would benefit from the potential upside not only from HPE stock, but also from CSC and MCRO. In other words, holders of Hewlett Packard stock would continue to enjoy abundant returns.

Hewlett Packard stock is projected to outperform the market, and it could go up to as much as $27.00 per share over the next 12 months, an increase of 27.59% from its closing price of $21.16 on September 13.