CSRA Waives Non-Compete, Clearing Another Major Hurdle For The Merger Between CSC And HPE Enterprise Services

HPE Enterprise Services has cleared a major business hurdle as it comes closer to completing its merger with CSC. Both CSC and CSRA have amended their non-compete agreement to ensure that HPE Enterprise Services' U.S. Public Sector business can remain intact during the merger with CSC.

Falls Church, Va.-based CSRA said Monday that it will lift the non-competition covenants restricting the business activities of Tysons, Va.-based CSC, No. 8 on the CRN Solution Provider 500, in certain areas of the U.S. federal, local and state government. The agreement was signed Friday, and announced Monday in a filing with the U.S. Securities and Exchange Commission (SEC).

"That's something we gave up, but there are things we gained in the new agreement," Stuart Davis, CSRA's vice president of investor relations and strategy, told CRN. "It was a tradeoff we thought was worth making."

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This reverses part of CSC's November 2015 separation agreement with its North American public sector business, which was spun off to become CSRA. That separation agreement was supposed to remain in effect until Nov. 27, 2017, nearly eight months after the expected April 3 close of the massive merger between CS and Palo Alto, Calif.-based HPE Enterprise Services (HPE ES), No. 3 on the CRN SP 500.

CSC, in November, identified the non-compete as a risk factor associated with its merger, given that HPE ES has a robust U.S. public sector business. One analyst told CRN in May that roughly 10 percent of the combined CSC-HPE ES will be in the federal business that competes directly with CSRA.

"CSRA’s lifting of the restrictions on CSC’s ability to sell to U.S. public sector clients provides more operational and integration flexibility to CSC as it prepares to merge with HPE Enterprise Services," CSC said in a statement.

The waiving of some non-compete provisions was foreshadowed by CSC's Jan. 23 SEC filing announcing the senior management team for the new company, which has not yet settled on a name.

In that filing, CSC announced that Marilyn Crouther – who has served since December 2011 as senior vice president and general manager of HPE ES's U.S. Public Sector business – will be continuing as SVP and GM of the combined company's U.S. Public Sector business.

’The recent agreement between CSC and CSRA will allow both companies to freely compete in the U.S. public sector space,’ Crouther said in a statement. ’We are committed to bringing innovative solutions to our U.S. public sector customers now and after the launch of the new company.’

That was a change from early November, when CSC Chief Financial Officer Paul Saleh told Wall Street analysts that the company was still evaluating all appropriate options for HPE ES's public sector business. In May, CSRA CEO Larry Prior said he was "tremendously interested" in opportunities that could arise from the CSC-HPE ES merger.

The November 2015 separation agreement between CSC and CSRA didn't restrict parties that control or are under common control with CSC from engaging in public sector activities, according to a November 2016 SEC filing.

In exchange for allowing CSC to sell into the U.S. public sector, CSRA is now permitted to sell services to certain additional non-U.S. government customers. CSRA currently has a presence in Europe, Africa and Southeast Asia, Davis told CRN, and the new agreement with open up additional countries to CSRA in one fell swoop rather than having to negotiate them with CSC on a case-by-case basis.

And if CSRA identifies an opportunity with a government entity not covered by the initial November 2015 agreement, the company can request CSC's permission to pursue the opportunity, which must be granted or withheld in good faith. CSRA today has a large state government presence in New York and North Carolina, Davis said, and the new agreement creates a better resolution process when additional state and local government opportunities emerge for CSRA.

Also, CSRA was freed from its obligation to pay CSC a maintenance fee of $30 million annually until November 2020, for which the company still had an outstanding balance of $120 million, Davis said. Instead, CSRA made a one-time payment of $65 million to CSC and has no further obligation to pay maintenance or product support fees.

CSRA was also assigned intellectual property rights to know-how that had been developed and held by CSRA but was owned by CSC. Also, CSRA was given intellectual property rights to source code, documentation, and trademarks exclusively related to CSRA product and services.

Until November 2020, CSRA's use of its know-how and developed products is restricted to use solely in connection with U.S. federal and certain U.S. state and local government customers. CSRA agreed to grant CSC a royalty-free, fully paid-up license to its developed products before November 2020 and solely outside the field of certain U.S. federal customers.

CSC, meanwhile, agreed to grant CSRA a royalty-free, limited license to certain products and services. Until November 2020, CSRA can use that license solely in connection with U.S. federal and certain U.S. state and local government customers.

"We hope it's a win-win, and both companies gained something in the process that was of value to them," Davis said.