Hewlett Packard Enterprise announces spinoff as earnings meet Street

HPE announces deal with CSC
HPE announces deal with CSC

Hewlett Packard Enterprise shares rose sharply on Wednesday after reporting earnings that met Wall Street's expectations and announced a spinoff of its enterprise services unit, which will merge with Computer Sciences.

The information technology company, itself a spinoff of the former Hewlett-Packard, posted adjusted earnings of 42 cents per share on $12.71 billion in sales for its fiscal second quarter on Tuesday. Profit fell 2 percent from 43 cents a year earlier, while revenue, which the company had struggled to increase, rose about 1 percent.

Analysts expected HPE to post earnings of 42 cents per share on $12.34 billion in revenue, according to a Thomson Reuters consensus estimate.

HPE shares spiked more than 11 percent in premarket trading Wednesday. Computer Sciences' stock soared as much as 30 percent.

The merger, which values HPE's services business at about $8.5 billion, is expected to be completed by the end of March 2017. HPE shareholders will own shares of both HPE and the combined company.

Trading Nation: Big tech surges
Trading Nation: Big tech surges

Computer Sciences CEO Mike Lawrie will serve as chairman and CEO of the combined company, while HPE CEO Meg Whitman will join its board. The companies expect $1 billion in first-year cost synergies after the deal's close.

"This brings scale to both companies. HPE services has reduced costs and focused on more profitable deals. In the long term they need scale. CSC will give them greater scale across a greater variety of customers," said Crawford Del Prete, chief research officer at IDC.

The companies expect the agreement will deliver about $8.5 billion to HPE shareholders after tax, including an equity stake of $4.5 billion in the new company, a $1.5 billion dividend, and the assumption of debt and other liabilities.

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In November, the former Hewlett-Packard split into HPE and HP Inc. The move separated the legacy hardware business from the enterprise computing segment.

This year, HPE's stock has climbed about 7 percent, while HP Inc. shares have advanced modestly. The S&P 500 has risen 1.6 percent in that time.

In the company's conference call Tuesday, Whitman highlighted 7 percent revenue growth in the enterprise group unit for the second quarter. She also touted the Chinese networking business.

HPE expects third-quarter earnings of 42 to 46 cents per share, worse than the 48 cents expected by analysts. Full fiscal-year earnings guidance of $1.85 to $1.95 per share compares with expectations of $1.88 a share.

— Programming note: HPE CEO Meg Whitman will join CNBC's "Squawk on the Street" at 9 a.m. EDT Wednesday.