EDS-Sprint Merger Appears to Be a Telecommunications Paper Tiger
Any bets as to how Federal Communications Commission Chairman Reed Hundt is going to queer this deal?
Actually, should the proposed EDS-Sprint merger ever be consummated, it will no doubt prove to be the least consequential multibillion-dollar merger in the history of American telecommunications. The combination of EDS and Sprint reveals nothing important about the future of media.
But given all the multimedia jockeying among the telephone companies, cable companies, personal computer companies, software companies and the studios, the very insignificance of this mega-deal assumes some significance. Somewhere, Tele-Communications Inc.’s John Malone is shaking his head and snickering.
That’s not to say EDSprint would be a foolish or wasteful deal; on the contrary, it might even be good for shareholders. However, let’s not view this combination as the inevitable byproduct of the “relentless convergence of computers and telecommunications” or a “bold, opportunistic thrust to wring synergies from systems integrators and network providers.”
This deal offers no unique insights into the digital future or promise for interactive innovation. There’s no grand strategic vision of customer service or high-bandwidth infobahns here, only the most parochial of self-interests.
EDS desperately wants out of its unhappy marriage with General Motors Corp. What Ross Perot and Roger Smith put together, current EDS Chairman Les Alberthal and GM Chairman Jack Smith seem prepared to rend asunder. Sure, EDS’ systems integration contracts with GM have been responsible for the overwhelming majority of the company’s growth and profit over the past decade. But so what? The world’s largest systems integration company desperately wants to be free of reporting to Detroit. EDS has been trying to sell itself to companies like AT&T; and British Telecom for years.
GM, for its part, has finally decided that it really is a car company after all. Besides, the auto giant has a humongous underfunded pension liability that a sale of EDS could help ease. EDSprint enables EDS to regain autonomy while taking a huge equity stake in the only global marketplace that’s growing as fast as computer services.
Sprint, meanwhile, hardly has a choice. It’s the third horse in a three-horse race. Sprint may be an $11-billion-a-year company, but it trails far behind AT&T; and MCI in market power. AT&T; is a colossus that can easily afford to spend $12 billion to acquire the nation’s largest cellular phone company. MCI has maneuvered British Telecom into being a multibillion-dollar strategic investor. Soon, perhaps by 2000, the seven Baby Bells will be allowed to compete in Sprint’s markets. They’ll go after long-distance’s No. 3 laggard like cape dogs after a wounded gazelle. So Sprint understandably feels a bit nervous.
In the purest sense, EDSprint would be a multibillion-dollar bet on the benefits of vertical integration. That’s not a bad bet. There’s no doubt that computer-to-computer communications is one of the best opportunities in telecommunications today. As more and more information goes digital and demands higher bandwidth and transmission rates, the distinction between computer networks and telecommunications networks begins to blur.
EDS, with its impressive array of global computer service contracts, and Sprint--with some excellent fiber-optic network technologies already in place--should easily be able to figure out how to customize data networks for their clients. “We want to be a one-stop provider for all information and communications needs,” EDS’ Alberthal said.
Yes, but is that what the customers want? Are they prepared to pay a premium for that? Or is this all merely a multibillion-dollar “so what”?
Don’t forget, EDS’ success as an $8.5-billion computer systems integrator and facilities manager comes in large part from its reputation as an honest broker. When EDS puts together a system for a customer, it insists that it seeks the best technology for the best price.
If IBM and not Hewlett-Packard is the way to go, EDS will reconfigure its designs accordingly. If Oracle databases make more sense than Sybase software, then that’s what EDS will integrate.
EDS wants its customers to know that it reaps no special benefits by promoting one brand of computer or software over another. Indeed, EDS already works with AT&T;, MCI and Sprint on proposals for corporate data networks.
Of course, if EDS and Sprint wed, how will EDS convince customers they’re getting the best deal on their networks? If MCI or AT&T; are prepared to underbid the Sprint portion of an EDS contract, what should a customer do? Stick with the highest bid? Should EDS turn Sprint into a telecommunications loss leader to capture more business? Or vice versa?
By merging with Sprint, EDS makes itself into a broker with an equity incentive to be less than objective. Conversely, should Sprint customers be concerned that the telecommunications company will analyze their data traffic to do market research for EDS? These are genuine concerns.
Now, it’s not entirely out of the question that EDSprint could collaborate to design value-added networks that can command premium prices in the market. But in an era when telecommunications competition is getting stiffer and the trend is toward open, non-proprietary computer architectures, is that the best business bet to make on the future?
Even if you put aside the challenges of integrating two radically dissimilar corporate cultures, merging EDS and Sprint represents little but a calculated gamble that the potential value of vertical integration to customers comfortably outweighs the potential for alienating customers.
If the gamble doesn’t pay off, look for a quickie divorce. If it does, it’s hardly likely to transform the way computing or telecommunications is done in the world.
