Pain and Gain for GM : EDS Spinoff Would Close Stormy, Profitable Chapter
The tempestuous 10-year marriage of General Motors Corp. and Electronic Data Systems could be judged GM’s most successful failure ever.
Acquired from Texas entrepreneur Ross Perot for $2.55 billion in 1984, the computer data-processing services company is now valued at $16 billion. Its steady profits have provided much-needed cash to the auto maker, and EDS brought order to the chaos of GM’s confusing maze of computer and telecommunications systems.
But it is less clear whether the acquisition--advertised as loaded with high-tech synergies--improved GM much as an auto maker. Despite its tremendous technological resources, GM still lags major competitors in the efficient design and manufacture of cars and trucks.
“EDS has been very profitable for GM,” said Joseph Phillipi, analyst for Lehman Bros. “But did it help them be a better car company? No.”
GM said this week it may spin off EDS; meanwhile, EDS is pursuing a possible merger with U.S. Sprint, the telecommunications giant.
The sale of EDS would end a volatile chapter in GM’s history that has brought both pain and gain to the world’s largest auto maker.
Early on, the relationship was overshadowed by a public clash of egos--GM’s pugnacious Roger Smith vs. EDS’ loquacious Perot--and the difficulty of meshing disparate cultures.
The acquisition of EDS was the brainchild of former GM Chairman Smith, who set out to remake the company with several broad strokes in the mid-1980s. Long fascinated with high-technology, he used GM’s $10-billion cash hoard to diversify the auto maker. The idea was to acquire businesses whose technologies could be transferred to the auto business and whose profits could see GM through cyclical slumps in the auto industry.
At the time, the EDS acquisition--which Smith once described to reporters as “a lulu"--was the largest undertaken by GM. But it was soon surpassed by the company’s $5.2-billion takeover of Hughes Aircraft Co. In both cases, Smith talked about high-tech possibilities that could help build GM into the car company of the 21st Century.
Smith laid out a futuristic vision. He saw car buyers eventually ordering cars on dealership computers. Orders would be sent via satellite to assembly plants. Parts would quickly be shipped by suppliers tied into an on-line computer system. Assembly would be done by robots programmed to meet each order. Meanwhile, GM’s finance arm would process the buyer’s loan application, using computers to check credit ratings.
Some analysts expected that the high-tech benefits would be elusive and noted that the computer services could be obtained from outside suppliers. Others worried that GM would stifle EDS’ entrepreneurial bent or rankle at Perot’s maverick style.
To maintain EDS’ independence, it was set up as a wholly owned subsidiary with a separate class of stock. Holders of the new Class E stock had a stake in EDS’ financial performance.
Meshing the two companies soon brought storm clouds. With EDS officials swooping into Detroit like a tornado, GM managers resisted their moves to take over computer operations. Resentment reached a fever pitch when 6,000 GM employees were transferred to EDS at lower pay.
Perot soon accused Smith of reneging on promises to maintain EDS’ independence. Smith’s anger grew as Perot publicly ridiculed GM as an unwieldy elephant. Detente came only after Perot resigned from the GM board in late 1986, taking a $750-million payoff with him.
EDS’ impact on GM initially was more mundane than many expected. Instead of building the factory of the future, it set about fixing GM’s archaic data-processing system--a mishmash of computers that often could not talk to one another.
“Roger Smith had a vision of technological interaction,” said David Healy, analyst with S.G. Warburg & Co. “But on the whole, that did not take hold very well.”
However, GM and EDS officials say EDS has been instrumental in improving the auto maker’s operations--but often in intangible ways.
“There have been a tremendous amount of places in GM where EDS has made the manufacturing, design and production faster, better and cheaper,” one GM official said. “But it’s hard to put a price tag on it.”
Analysts agree that it is difficult to assess EDS’ contribution to GM’s operations. What is easier to see is the financial impact. EDS market capitalization has increased sixfold in the last decade, and it has contributed $4 billion in profits to GM.
In fact, EDS may have gotten more out of the merger than GM. “It has allowed us to grow our business much faster than we could have alone,” EDS spokesman Tony Good said.
With GM’s backing, EDS has aggressively sought to increase its reach. In 1985, GM made up 75% of EDS’ business; today it accounts for only 38%. EDS is also expanding abroad and into new business areas--moves made easier by its ties to GM, which has a presence throughout the world and has given EDS exposure to computer-aided design and manufacturing.
GM’s decision to shed EDS comes as the auto industry worldwide is shunning the diversification strategy of a decade ago. Increasingly, auto makers are focusing on making vehicles and strengthening their balance sheets for battle in developing markets.
A Match Made in...?
Electronic Data Systems’ revenue and profit have grown steadily since General Motors acquired it in 1984. The unit has also increased its non-GM business: Its auto maker parent accounted for about 75% of EDS sales in 1985 but only 38% in 1993.
EDS REVENUE & PROFIT (in millions)
Revenue Profit Year (in billions) (in millions) 1984 $0.9 $81 1985 3.4 189 1986 4.4 261 1987 4.4 323 1988 4.8 384 1989 5.5 435 1990 6.1 497 1991 7.1 548 1992 8.2 636 1993 8.6 724