Services giant CSC to be broken up?

CSC's rumoured dismemberment follows costs inflicted after NHS IT project disaster

Computer services specialist CSC, one of the companies behind the disastrous National Programme for IT (NPfIT) in the NHS, is preparing for a break-up that may see parts of the company sold to private equity.

An announcement is expected with as early as next week, according to Reuters, when CSC releases its fiscal 2015 results.

"The break-up would follow multiple attempts by CSC over several years to sell itself," claimed Reuters. "The company is in the midst of a cost-cutting campaign amid sequestration and budget pressures from the US government. However, its government business is seen as attractive to potential buyers because of the high barriers to entry for competitors."

According to Anthony Miller, managing partner at analyst group TechMarketView, part of the reason for the break-up is the massive write-off related to the NPfIT, which will contribute to an expected $4.3bn pre-tax loss.

"The smart money is on CSC selling off its North American Public Sector (NAPS) business to private equity, with the rest going in a trade sale. NAPS represents just under one-third of CSC's total $12bn-13bn annualised revenues," said Miller.

However, the likely buyers for the rest of the business, which Miller guestimates to be worth around $5bn, are all otherwise engaged.

"Capgemini has been mooted as a possible buyer, but they are shelling out $4bn to buy IGATE. Canada's CGI has also been mentioned, and given their penchant for bold acquisitions (such as Logica) you could see the temptation. However, they already carry some $1.6bn in net debt. HP has also been mentioned, but their fingers have been burned too many times surely to take such a risk."

According to Reuters, all three of these companies have been tapped-up as potential buyers, but were unable to meet CSC's "valuation expectations". Likewise, indicates Reuters, private equity firms have also baulked at the asking price.

Miller believes that one of the major India-based outsourcing companies might be tempted to make a rare, major acquisition. His suggestion is TCS, although Reuters' sources say that shareholders will be given a tax-efficient stake in a rump CSC.

"While CSC is still open to acquisitions, it now sees a split in which shareholders would also get stock in a new company as the most attractive and tax-efficient transaction to pursue," claimed Reuters.