WASHINGTON, November 16, 2015 – Software, consulting and government contracting firm CSC is about to split into two separate companies, marking its greatest structural change in over 55 years in business.
This action will mark the end of an era for CSC, currently ranked Number 8 in Software Magazine’s “Software 500” list. In many ways, the upcoming transaction is also a sign of our troubled economic times, as we’ll briefly explain.
Given the Washington location of Communities Digital News (CDN) and given the fact that many CSC employees and other investors own shares of the company, we’ve decided to provide a detailed account of how the transaction will be done. We hope it will prove useful to a number of our regular readers who may own the stock but who not have read the fine print in materials the company or a brokerage firm by now has generally provided.
That’s because in corporate split/spinoff/special dividend transactions like this one, a one- to two-week carnival of temporary and “old” stocks in the soon-to-split or spin-off company begin to trade simultaneously, creating some confusion as to what an investor actually owns at a given point in time.
Read our latest CSC update: Updating the evolution of Computer Sciences Corp [CSC]
Further, particularly when certain payouts like CSC’s upcoming special dividend/distribution are involved, there can be a variety of tax consequences to current holders. You should know and understand them.
So hold on to your seats. The ride is complicated, but also interesting and surprisingly logical once you parse it out. It’s still a little strange for the neophyte, however, so if that’s your situation, please read slowly and bear with us.
Background of the upcoming CSC transaction
For many years, Computer Sciences Corporation—a Fortune 500 company better known today simply as CSC (symbol: CSC)—has been a major player in the Washington, D.C.-area Federal contracting business. Originally founded in 1959 as a Los Angeles, California a software company, CSC was an early pioneer in a software and contracting industry that is today one of America’s greatest economic drivers.
Rapidly growing its business lines, CSC gradually expanded its original portfolio to include contracting and consulting services to the Federal government, most notably to the Department of Defense and other major government agencies. The government contracting arena experienced explosive growth both here and internationally, making CSC one of the largest contractors of government business in the world with some 70,000 employees in over 70 countries.
Given its massive Federal and international footprint, it was not a surprise when the company decided to pull up its California roots in 2008, replanting itself just across the Potomac River from the nation’s capital in the northern Virginia inner suburb of Falls Church. The move made sense in two ways, allowing the company to escape from California’s increasingly onerous corporate tax burden while bringing CSC closer to its main Federal and international government clients.
Unfortunately, 2008 was not a good year for any corporation. Worse, CSC made a number of costly corporate missteps in its worldwide government contracting business—most notably, failures on a major UK contract as well as a highly visible failure here to meet crucial deadlines in an Obamacare-related contract to modernize IRS tax-filing and fraud detection systems. Something had to be done.
Under fire on a number of fronts, CSC shook up its management team, and brought in a new CEO whose team worked overtime to put out these costly contracting blazes and steady its corporate reputation. In their somewhat controversial process of re-examining CSC’s business model, current management concluded this spring that the company would function better moving ahead if it were to split into two separate, “pure-play” companies, one focused on its commercial business and the other solely devoted to its public sector portfolio.
“The vision we outlined in May,” said Mike Lawrie, president and CEO of CSC, in a late spring statement, “is becoming a reality. Today’s announcement marks another important milestone towards the completion of our business separation and the establishment of CSRA, a new leader in U.S. public sector IT services.”
This month, CSC will conclude a series of transactions that will complete its ambitious split. And please note: this isn’t anything like a typical 2-for-1 “stock split” in which you get two shares, worth roughly half the original price, for the one fully priced share you own. In this case, the company itself is splitting into two wholly independent companies.
For those holding the stock—including yours truly, here’s how the process will unfold:
How the division of CSC will work for shareholders
The corporate split will divide the current CSC into two separate companies: CSC, which will be focused on commercial business lines and which will retain the company’s original trading symbol, CSC; and CSRA, Inc. (CSRA), the new company and new name that will continue with existing and future U.S. public sector business. According to a corporate release, “The separation will occur through a one-for-one pro rata distribution of all CSRA shares to CSC stockholders.” In other words, if you currently hold 100 shares of the existing CSC, you’ll get 100 shares of CSRA.
When the stock split transaction occurs, a special two-part cash-distribution of $10.50 will be paid out to all current holders of CSC stock, subject to the provisions described below. Now, things get a little complicated.
Functionally, in a split/spinoff of this nature, the original stock’s ex-dividend date, which usually precedes, by three business days, the dividend record date—the day upon which dividend-paying stocks like CSC actually pay out their quarterly dividends—will come after the record date. That’s because, in this case, the record date is also when two different stocks actually begin to trade under separate values as “when-issued” stocks, usually designated by a stock ticker symbol ending in –WI or /WI.
According to CSC, “Beginning on or about November 16, 2015 and continuing up to and through the distribution date, it is expected that there will be two markets in CSC common stock. Shares that trade in the regular-way market will be entitled to receive both the shares of CSRA common stock and the Special Dividend; shares that trade in the ex-distribution market will trade without the entitlements to shares of CSRA common stock or the Special Dividend. Shares of CSC in the ex-distribution market will trade under the ticker symbol CSC WI.”
Again, functionally, what this means is that very shortly, perhaps slightly before CSC’s designated November 18 record date, three CSC stocks will actually commence trading: the “old” CSC, which will still carry the $10.50 cash distribution and the commensurate number of eventual CSRA shares; the “virtual” new CSC shares, designated CSC/WI; and the “virtual” new CSRA shares, trading as CSRA/WI.
To be honest, I’ve never quite been sure how they make the math work on transactions such as these. But what this interim action means is that regular CSC shares will retain the full value of the transaction: x shares of CSC, x shares of CSRA and $10.50 cash. CSC/WI will trade on the value of the post-split CSC alone and without the right to the full $10.50 dividend and CSRA shares. And likewise, CSRA/WI will trade on the value of the post-split CSRA alone and without the right to the full $10.50 dividend and CSRA shares.
Why so complicated? At its most basic, it’s very simple. When corporate divisions like this occur, it sometimes takes awhile for the newly separated companies to re-establish stable market value on the exchanges, as well as determining what kind of upcoming dividends, if any, stockholders might expect in the future.
Those holding original or pre-split CSC shares will certainly get that $10.50 payout. But they’ll also get shares in two effectively new companies in a market that isn’t entirely sure what those shares are worth, subjecting trading to potential volatility. For that reason, investors attracted to only one or the other of the surviving companies can watch what’s happening to their “when-issued” stock on the market to determine which one they think might be a better value in their portfolio, moving ahead.
“When-issued” trading helps establish that approximate value ahead of time, and those shares ultimately drop the “/WI” designation on the ex-date with owners of those “/WI” shares now having the actual shares of the new company. It’s a bit of a brain-buster, but it sorts itself out in the end, and it’s the way things like this are done in accordance with U.S. securities laws.
In point of fact, we noted that the shares of CSRA/WI actually started trading today, which is not an uncommon occurrence even though it’s not yet the “record date.” We did not note any transactions today, however, in CSC/WI. But according to the CSC memo, the official “record date”—the date “old” CSC, CSRA/WI and CSC/WI all start trading—is November 18, 2015.
“Following the distribution of CSRA shares, CSC and CSRA each will pay concurrent special cash dividends which, in the aggregate will total $10.50 per share. Of that $10.50 per share dividend, $2.25 will be paid by CSC and $8.25 will be paid by CSRA.” What this means, at least to the Prudent Man, is that “old CSC” holders will get the full dividend, while WI holders will get their aforementioned piece of it. Check with your broker on this one.
Moving ahead, the distribution of CSRA shares to owners of “old” CSC shares “is expected to occur on November 27, 2015, after the close of trading on the New York Stock Exchange (NYSE),” while “the payment of the Special Dividend (distribution) is expected to occur on November 30, 2015.
Just to make things a bit more interesting, remember that November 27, 2015 is Black Friday, the day after Thanksgiving, a national holiday during which banks and markets are closed. November 27 is a short day of trading, and markets close that day at 1 p.m. EST.
One more thing: on the following trading day, Monday, November 30, in a previously announced transaction, CSRA will fold in the shares of another company, SRA International (SRA), which the original CSC had arranged to acquire. Current SRA holders should check literature they’ve received for the details, as you’re about to become CSRA holders very soon.
When the smoke finally clears, presumably by November 30, 2015, the $10.50 distribution/dividend will be paid out to eligible shareholders, “old” CSC will go away, the “/WI” shares will shape-shift into real shares, and “new” CSC (CSC) and brand new CSRA (CSRA) will remain, and will trade wherever investors choose to take them on the New York Stock Exchange where both will be listed.
Bad news: It appears that the $10.50 distribution/dividend or portion thereof will be taxable to those who receive it, unless (presumably) those shares are held in an IRA.
Better news: the receipt of CSRA shares by existing holders of “old” CSC are regarded as tax-free.
If you have questions on any of the details, check with your broker. The key here is that any individual wishing to get involved at any stage of this transaction needs to know before hand just what it is that he or she is actually purchasing. In any event, that’s always a good idea anyway when it comes to buying or selling any investment.
Full disclosure: The Prudent Man already owns a small number of “old” CSC shares, and is staying in for the end-of-November ride. Fingers crossed. It looked like a decent deal, but in the Market of 2015, you never know.