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Summary

CSC's Government Services unit (CSGov) will combine with privately owned US government contractor SRA upon completion of its spin-off from CSC. The combined company will become the largest pure-play IT services provider to the US government sector, with combined FY2015 revenues of approximately $5.5bn, of which CSGov accounts for $4.1bn. The combined business will have nearly 19,000 employees, again, the majority (~13,500) from CSGov. CSC and SRA expect to complete the transaction before the end of November 2015.

Stabilizing CSC piece by piece

CSGov wasn't destined to stay a standalone entity for long after its separation from its mother company. While this isn't an acquisition, the coming together of the privately owned SRA and the much larger CSGov represents a significant consolidation in the US government IT supply-side industry. The combined entity, which has yet to be named, will have access to 150 US government contract vehicles and 1,500 active projects.

CSC is slimming down to focus on its core SI business. As well as splitting off CSGov, it recently spun off its banking software assets into a joint venture with HCL. CEO Mike Lawrie is stabilizing CSC piece by piece. However, shrinking businesses rarely recover in the IT industry, unless they manage to reinvent themselves, as IBM did in the 1990s. As well as the loss of revenues, CSGov was one of the more profitable parts of CSC, delivering a 14.1% operating income margin in FY15, compared with 6.7% for its core managed services business.

But Lawrie must continue his transformation of the core CSC. There were no buyers for the "old" CSC, so now the strategy is to realize the value of noncore assets, while transforming the CSC Commercial business into a next-generation IT services business. Other "heritage" IT services vendors face similar challenges. CSC is on the right path, but customers often pay as much attention to market perception as they do to strategy, and a smaller company won't do much to alter that perception. That's why Lawrie's ultimate strategy must be to attract a buyer, or do like Dell and go private. Either way, it needs to happen soon.

Appendix

Further reading

CSC's Ongoing Reinvention, IT0019-003390 (December 2014)

"CSC recommits to Hogan and CAMS clients with HCL joint venture,"IT0003-000661 (August 2015)

"CSC splits into two: a pre-cursor of future industry consolidation?" IT0019-003453 (May 2015)

Author

Ian Brown, Senior Analyst, IT Services

ian.brown@ovum.com

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