Acquisitions

Fiscal 2018 Acquisitions

HPES Merger

On April 1, 2017, Hewlett Packard Enterprise Company (“HPE”) completed the spin-merger of its Enterprise Service segment, HPES, to form DXC. On that same date, CSC completed its merger with DXC, whereupon a wholly owned subsidiary of DXC merged with and into CSC with CSC surviving as a wholly owned subsidiary of DXC (the "Merger"). Following the completion of the Merger, DXC became a separate publicly traded company. The strategic combination of the two complementary businesses was to create a versatile global technology services business, well positioned to innovate, compete and serve clients in a rapidly changing marketplace.

In connection with the Merger, CSC’s Mike Lawrie became chairman, president and CEO of DXC and HPE’s president and CEO Meg Whitman joined the DXC board. The initial remaining board appointments are split equally between nominees of HPE and existing members of CSC’s board.

The transaction between HPES and CSC is a reverse merger acquisition, with DXC representing the legal acquirer of the business and CSC representing the accounting acquirer. While purchase consideration transferred in a business combination is typically measured by reference to the fair value of equity issued or other assets transferred by the accounting acquirer, CSC did not issue any consideration in the Merger. CSC stockholders received one share of DXC common stock for every one share of CSC common stock held immediately prior to the Merger. DXC issued a total of 141,298,797 shares of DXC common stock to CSC stockholders, representing approximately 49.9% of the outstanding shares of DXC common stock immediately following the Merger.

All share and per share information has been restated to reflect the effects of the Merger. The reverse merger is deemed a capital transaction and the net assets of CSC (the accounting acquirer) are carried forward to DXC ( the legal acquirer and the reporting entity) at their carrying value before the combination. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of CSC which are recorded at historical cost. The equity of the Company is the historical equity of CSC, retroactively restated to reflect the number of shares issued by DXC in the transaction.

In connection with the Merger, the Company entered into a number of agreements with HPE including the following:

Information Technology Services Agreement - The Company and HPE have entered into an Agreement pursuant to which the Company will provide information technology services to HPE. This agreement terminates on the fifth anniversary of its’ effective date, unless earlier terminated by the parties in accordance with its terms.

Preferred Vendor Agreements - The Company and HPE have entered into Preferred Vendor Agreements, pursuant to which HPE will (1) make available to DXC for purchase hardware products sold by HPE and technology services provided by HPE and (2) make available to DXC for purchase and license software products sold or licensed by HPE, and technology (including SaaS), support, professional and other services provided by HPE.

Certain other additional agreements were entered into, including an employee matters agreement, a tax matters agreement, a transition services agreement, an intellectual property matters agreement, and certain real estate related agreements.

Under the acquisition method of accounting, total consideration exchanged was:



Preliminary fair value of purchase consideration received by HPE stockholders⁽¹⁾	$	9,782
Preliminary fair value of HPES options assumed by CSC⁽²⁾	68
Total estimated consideration transferred	$	9,850

(1)Represents the fair value of consideration received by HPE stockholders to give them 50.1% ownership in the combined company. The fair value of the purchase consideration transferred was based on a total of 141,865,656 shares of DXC common stock distributed to HPE stockholders as of the close of business on the record date (141,741,712 after effect of 123,944 cancelled shares) at CSC's closing price of $69.01 per share on March 31, 2017.

(2)Represents the fair value of certain stock-based awards of HPES employees that were unexercised on March 31, 2017, which HPE, HPES and CSC agreed would be converted to DXC stock-based awards.

Assumed indebtedness includes senior notes in the principal amount of $1.5 billion issued in 2017 and $0.3 billion issued in 1999 for total principal amount of $1.8 billion; a term loan with three tranches all borrowed on March 31, 2017 in an aggregate principal equivalent of $2.0 billion; as well as capitalized lease liabilities and other debt. The fair value of assumed indebtedness approximates HPES' carrying value due to the close proximity of the issuance of the majority of the assumed debt to the Merger date. The Company is in the process of finalizing the valuation of the debt issued in 1999.

The Company's preliminary estimates of fair values of the assets acquired and the liabilities assumed, as well as the fair value of non-controlling interest, are based on the information that was available as of the Merger date, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the Merger date. The preliminary estimated purchase price is allocated as follows:



(in millions)	Estimated Fair Value
Cash and cash equivalents	$	974
Accounts receivable⁽¹⁾	3,965
Other current assets	769
Total current assets	5,708
Property and equipment	2,482
Intangible assets	5,085
Other assets	1,694
Total assets acquired	14,969
Accounts payable, accrued payroll, accrued expenses, and other current liabilities	(3,843		)
Deferred revenue	(879		)
Long-term debt, net of current maturities	(3,997		)
Long-term deferred tax liabilities and income tax payable	(1,553		)
Other liabilities	(1,551		)
Total liabilities assumed	(11,823		)
Net identifiable assets acquired	3,146
Add: Fair value of non-controlling interests	(61		)
Goodwill	6,765
Total estimated consideration transferred	$	9,850


⁽¹⁾	Includes preliminary adjustments related to the Separation and Distribution Agreement, as amended, of $163 million.

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the Merger date. The goodwill recognized with the Merger was attributable to the synergies expected to be achieved by combining the businesses of CSC and HPES, expected future contracts and the acquired workforce. The cost-saving opportunities are expected to include improved operating efficiencies and asset optimization. The goodwill arising from the Merger was preliminarily allocated to the Company's reportable segments as $2.8 billion to the Global Business Services ("GBS") segment, $3.3 billion to the Global Infrastructure Services ("GIS") segment and $0.7 billion to the United States Public Sector ("USPS") segment. A portion of the total goodwill is expected to be deductible for tax purposes. See Note 9 - "Goodwill."

Due to the recent completion and complexity of the Merger, DXC recorded the assets acquired and liabilities assumed at their preliminary fair values. The preliminary purchase price allocation is subject to change as DXC completes its analysis of the fair value at the date of the Merger.

As of June 30, 2017, DXC has not finalized the determination of fair values allocated to various assets and liabilities, including, but not limited to, Receivables; Property and equipment; Deferred income taxes, net; Deferred revenue and advanced contract payments; Intangible assets; Accounts payable and accrued liabilities; Loss contracts; Non-controlling interest; and Goodwill. The Company has also not finalized its assessment of operating leases that were off balance sheet as of April 1, 2017, as a result of the conversion of certain capital leases prior to the Merger. Pursuant to the terms of the Separation and Distribution Agreement, as amended, HPE was contractually required to reduce the outstanding liability balance to a contractually agreed amount by September 30, 2017, related to HPES' approximately 6,000 capital lease arrangements with HPE Financial Services. HPES has represented that all capital leases converted to operating leases prior to April 1, 2017 as agreed under the terms of the Separation and Distribution Agreement, as amended, meet the criteria for operating lease treatment. Given the significant number of agreements subject to modification, the Company will continue to assess the appropriateness of operating lease treatment.

Current assets and liabilities

For the preliminary fair value estimates reported in first quarter of fiscal 2018, the Company valued current assets and liabilities using existing carrying values as an estimate for the fair value of those items at the Merger date.

Property and equipment

The acquired property and equipment are summarized in the following table:



(in millions)	Amount
Land, buildings, and leasehold improvements	$	1,806
Computers and related equipment	504
Furniture and other equipment	37
Construction in progress	135
Total	$	2,482

The Company estimated the value of acquired property and equipment using the cost method and market method.

Identified intangible assets

The acquired identifiable intangible assets are summarized in the following table:



(in millions)	Amount		Estimated Useful Lives (Years)
Customer relationships	$	3,950	13
Developed technology	440		7
Third-party purchased software	499		4-7
Trade names	110		4
Other intangibles	86		7
Total	$	5,085

The Company estimated the value of customer relationships, developed technology, and trademarks using the multi-period excess earnings and relief from royalty methods.

Restructuring liabilities

The Company acquired approximately $333 million of restructuring liabilities incurred under HPES' restructuring plans, expected to be paid out through 2029. Approximately $256 million relates to workforce reductions and $77 million .

Deferred tax liabilities

The Company preliminarily valued deferred tax liabilities based on statutory tax rates in the jurisdictions of the legal entities where the acquired non-current assets and liabilities are taxed.

Defined Benefit Pension Plans

Certain eligible employees, retirees and other former employees of HPES participated in certain U.S. and international defined benefit pension plans offered by HPE. The plans whose participants were exclusively HPES employees were acquired, while the plans whose participants included both HPES employees and HPE employees were replicated to allow separation of HPES and HPE employees. The resulting separate plans containing only HPES were acquired.

HPES' pension obligations depend on various assumptions. The Company's actuaries remeasured all of the acquired HPES plan obligations as of March 31, 2017. The following table summarizes the balance sheet impact of the pension plans assumed from HPES as a result of the Merger.



(in millions)	Amount
Other assets	$	558
Accrued expenses and other current liabilities	(16		)
Other long-term liabilities	(563		)
Net amount recorded	$	(21	)

The following table summarizes the projected benefit obligation, fair value of the plan assets and the funded status assumed from HPES as a result of the Merger.



(in millions)	Amount
Projected benefit obligation	$	(7,432	)
Fair value of plan assets	7,411
Funded status	$	(21	)

The following table summarizes the plan asset allocations by asset category for HPES pension plans assumed by the Company as a result of the Merger.



Equity securities	22	%
Debt securities⁽¹⁾	72	%
Alternatives	5	%
Cash and other	1	%
Total	100	%

⁽¹⁾ Includes liability-driven investments

The following table summarizes the estimated future benefit payments due to the pension and benefit plans assumed from HPES as a result of the Merger.



(in millions)	Amount
Employer contributions:
2018	$	37

Benefit payments:
2018	$	222
2019	$	147
2020	$	158
2021	$	168
2022	$	180
2023 through 2027	$	1,132

Unaudited Results

During the three months ended June 30, 2017, HPES had revenues and net income of $4,328 million and $190 million, respectively, since the acquisition date. Transaction costs associated with the Merger of $25 million are included within Selling, general and administrative expenses in the Company's condensed consolidated statements of operations for the three months ended June 30, 2017.

Unaudited Pro Forma Results of Operations

The following table provides unaudited pro forma results of operations for the Company for the three months ended July 1, 2016, as if the Merger had been consummated on April 2, 2016, the first day of DXC's fiscal year ended March 31, 2017. These unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies. In addition, the unaudited pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analyses are performed during the measurement period. Accordingly, the Company presents these unaudited pro forma results for informational purposes only, and they are not necessarily indicative of what the actual results of operations of DXC would have been if the Merger had occurred at the beginning of the period presented, nor are they indicative of future results of operations.

CSC reported its results based on a fiscal year convention that comprised four thirteen-week quarters. HPES reported its results on a fiscal year basis ended October 31. As a consequence of CSC and HPES having different fiscal year-end dates, all references to the unaudited pro forma statement of operations include the results of operations of CSC for the three months ended July 1, 2016 and of HPES for the three months ended April 30, 2016.



(in millions, except per-share amounts)	Three Months Ended July 1, 2016⁽¹⁾
Revenues	$	6,418
Net loss	(281		)
Loss attributable to the Company	(283		)

Loss per common share:
Basic	$	(1.00	)
Diluted	$	(1.00	)


⁽¹⁾	The unaudited pro forma information is based on legacy CSC results for the three months ended July 1, 2016 and legacy HPES results for the three months ended April 30, 2016.

The unaudited pro forma information above is based on events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the unaudited pro forma statement of operations, expected to have a continuing impact on the consolidated results of operations of the combined company. The unaudited pro forma financial information does not include $25 million of nonrecurring transaction costs associated with the Merger.

Fiscal 2017 Acquisitions

Aspediens Acquisition

On July 5, 2016, DXC acquired all of the outstanding capital stock of Aspediens, a privately held provider of technology-enabled solutions for the service-management sector and a preferred partner of ServiceNow, for total purchase consideration of $15 million funded from existing cash balances.

Xchanging Acquisition

On May 5, 2016, DXC acquired Xchanging plc ("Xchanging"), a provider of technology-enabled business solutions to organizations in global insurance and financial services, healthcare, manufacturing, real estate, and the public sector in a step acquisition. Xchanging was listed on the London Stock Exchange under the symbol “XCH.” Total cash consideration paid to and on behalf of the Xchanging shareholders of $693 million (or $492 million net of cash acquired) was funded from existing cash balances and borrowings under DXC's credit facility. Transaction costs associated with the acquisition of $17 million were included within Selling, general, and administrative expenses. The acquisition expanded CSC's market coverage in the global insurance industry and enabled the Company to offer access to a broader, partner-enriched portfolio of services including property and casualty insurance and wealth management business processing services.

The Xchanging purchase price was allocated to assets acquired and liabilities assumed based upon the determination of fair value at date of acquisition as follows: $396 million to current assets, $99 million to non-current assets, $582 million to intangible assets other than goodwill, $267 million to current liabilities, $516 million to long-term liabilities, $680 million to goodwill, and $281 million to non-controlling interest. The amortizable lives associated with the intangible assets acquired includes developed technology, customer relationships and trade names, which have estimated useful lives of 7 to 8 years, 15 years and 3 to 5 years, respectively. The goodwill arising from the acquisition was allocated to the GBS and GIS segments and is not deductible for tax purposes.