DXC To Unload U.S. Government Business, Merge It With Two Other Firms To Form $4.3 Billion Titan

DXC Technology plans to excise its U.S. government business and initiate a merger with two other companies to create a 14,000-employee public sector powerhouse with security, cloud and analytics mastery.

The Tysons, Va.-based company, No. 11 on the 2017 CRN Solution Provider 500, said the combination of its $2.9 billion U.S. public sector business, $1.2 billion federal government consultancy Vencore, and $300 million background investigation service provider KeyPoint will create one of the five largest pure-play U.S. government solution providers.

"We like the federal government market," Mike Lawrie, DXC's chairman, president and CEO, told Wall Street analysts late Wednesday. "It's just that we think it's right for an end-to-end, vertically focused company."

[Related: DXC Technology To Acquire Logicalis SMC To Boost Global ServiceNow Practice]

The split and merger are expected to close March 31, with the name of the new company yet to be determined. DXC's stock is up $3.71 (4.23%) in trading Thursday to $91.36 per share.

The new company will be led by Vencore President and CEO Mac Curtis, with DXC U.S. Public Sector Senior Vice President and General Manager Marilyn Crouther serving as the company's chief operating officer. Lawrie will chair the new company's board of directors, with Veritas Capital CEO and Managing Partner Ramzi Musallam also sitting on the board.

DXC shareholders will own approximately 86 percent of the new company's common shares, with Veritas Capital – the private equity owner of Vencore and KeyPoint – owning the remaining 14 percent of shares. Veritas will also receive a payment of $400 million as part of the merger.

The DXC assets involved in the deal come from the HPE Enterprise Services business, which merged with CSC in March 2017 to form DXC. CSC actually spun off its U.S. public sector business back in November 2015, which it turn merged with SRA International to form $5 billion U.S. government goliath CSRA, No. 14 on the 2017 CRN Solution Provider 500.

Lawrie served as CSRA's chairman of the board for the first nine months of the company's existence until resigning in August 2016. Now he will lead the board of one of CSRA's top competitors.

Chantilly, Va.-based Vencore is home to some the industry's most experienced cyberexperts and supports 170 Ph.D.s, according to Lawrie. Combined, Lawrie said the new company will have more than 1,000 certified Agile developers and hold 260 patents.

"This is expertise that, quite candidly, we didn't have in [DXC's] USPS [U.S. public sector business], and now it can be leveraged across all of the USPS client base," Lawrie said. "This is a unique combination of assets that has never been put together the way we're putting it together."

The deal will enable the new company to cross-sell consulting, cloud and analytics into DXC's legacy customer base and cross-sell infrastructure, application development and systems integration into Vencore's traditional base of clients, according to Lawrie.

Vencore in June filed a registration statement for an initial public offering with the U.S. Securities and Exchange Commission, and updated that statement in August. The company indicated in its SEC filing that sales hit $1.17 billion in 2016, up 68.9 percent from $691.7 million four years earlier, while recording net income of $1 million, improved from a loss of $117.7 million in 2012.

Lawrie acknowledged that Vencore's IPO-related filings brought DXC to the table in pursuit of a deal. Vencore and Veritas Capital ultimately decided that the unique combination of assets assembled within the combined company was more compelling than doing an IPO, according to Lawrie.

KeyPoint, meanwhile, provides its specialized investigative services to intelligence, civilian and defense clients within the U.S. government ecosystem, Lawrie said. The company disclosed in December 2014 that its computer network had been breached, and it's believed that security credentials from that breach were used to infiltrate Office of Personnel Management (OPM) computer systems in mid-2015.