GM to Shed Computer Services Division EDS : Computers: The move is part of the auto maker’s decision to spin off divisions as it concentrates on its core business.
General Motors Corp. said Monday that it plans to spin off Electronic Data Systems, its computer services subsidiary, in a deal that would end the auto maker’s stormy but profitable ownership of the company founded by Texas billionaire Ross Perot.
Analysts generally said the 11-year marriage of the two companies benefited both firms, but most agreed it was time for them to go their separate ways. For GM, it is another indication of its desire to focus on making cars, and for EDS it represents a return to its entrepreneurial roots to compete more nimbly in the fast-changing world of digital communications.
“A failed experiment? Hardly,” said David Garrity, an auto analyst with Smith Barney Inc. “This is a company that prospered under GM management.”
The spinoff proposal comes as no surprise: General Motors has been selling off most of its non-automotive operations. In June, it sold its National Car Rental unit and earlier this year said it might spin off EDS, which it acquired in 1984 for $2.5 billion. A deal to merge EDS with Sprint collapsed last year.
The spinoff would leave GM with only one non-automotive unit, Hughes Electronics. The car maker said Monday it has no plans to dispose of Hughes because it is a “strategic asset” that still provides significant technological advantages to GM. Los Angeles-based Hughes Electronics has 80,000 employees, including 30,000 in California.
GM shareholders would receive about one share of EDS stock for each share of Class E GM stock--70% of which is owned by the public and 30% by GM’s pension fund. The Class E shares, issued to GM shareholders when it acquired EDS, have been tied to EDS’ performance. The spinoff is subject to Internal Revenue Service approval as a tax-free transaction as well as shareholder approval.
After the announcement, GM Class E shares jumped $2.50 to $46.125 on the New York Stock Exchange. GM added 12.5 cents to $48.375; and GM Class H, shares of the GM Hughes unit, rose 37.5 cents to $42.25.
EDS has more than doubled in size and sales since GM acquired it. Employees now total 80,000 and its $10 billion in revenue represented 7% of GM’s worldwide sales of $142 billion last year.
“It turned out to be a good acquisition because the systems integration business exploded, as did the sale of information technology in general,” said Alan C. Shapiro, chairman of the finance and business economics department at the USC School of Business Administration.
The company sells a wide range of systems integration, telecommunications and computer programming services worldwide. GM accounts for roughly a third of its business. The company’s growth comes mainly from global customers ranging from Xerox Corp., with which it has a 10-year, $3.2 billion contract, to Britain’s internal revenue agency.
EDS-NET, the company’s global digital network, has been successful, processing about 43 million transactions a day, linking 411,000 personal computers and featuring a storage capacity equal to 45 Libraries of Congress. EDS is also well-poised to snag contracts in emerging global health care information technology, said CS-First Boston analyst David M. Togut.
But GM realizes that EDS needs a more entrepreneurial environment to grow and “that depends on having EDS stock as opposed to GM letter stock to award to key executives,” Shapiro said.
EDS Chairman Les Alberthal said in a statement that a “rapidly changing competitive landscape has demonstrated the fact that EDS’ strategic objectives are best attained as an independent company.” Alberthal would remain chief executive of EDS after the spinoff.
Perot founded EDS in 1962 with $1,000 of his wife’s savings and quickly found a market as an outside provider of computer services, including accounting, payroll and insurance claims to the government and to companies. He built up computer capacity by contracting to use other companies’ mainframes at night and on weekends.
While making millions, Perot was also making headlines by going to Vietnam to negotiate for the release of POWs, by financing the rescue of two EDS employees from an Iranian prison in 1979 and by backing hostage-rescue proposals in Lebanon and elsewhere.
Of the $2.5 billion that GM paid for EDS, Perot received nearly $1 billion in cash as well as a huge chunk of GM preferred stock. But Perot and GM’s then-Chairman Roger Smith quarreled bitterly over management issues.
In 1986, GM and Perot parted company after the auto maker bought back the preferred stock from Perot for $700 million. Perot later formed his own computer services firm, Perot Systems. “Making EDS an independent company is a brilliant business move by all parties involved,” Perot said in a statement.
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The Data on EDS
Electronic Data Systems Corp., which developed the computer system used during the 1994 World Cup in Pasadena, performs information-processing activities for a variety of companies and government agencies. The company, which is set to be spun off from its parent, General Motors Corp., is considered the inventor of “outsourcing,” or the farming out of computer operations to third-party service companies. Some facts and figures: * 1962: Company founded with $1,000 investment by billionaire Ross Perot. * 1966: EDS enters the Medicare and Medicaid processing business. * 1968: EDS goes public with an initial stock offering of $16.50 a share. * 1973: The company’s annual revenue tops $100 million. * 1979: An EDS rescue squad frees two company employees imprisoned in Iran. * 1984: General Motors acquires EDS for $2.5 billion. * 1986: Les Alberthal becomes president and chief executive. Perot and three top officials leave the company and GM’s board in a rancorous $700-million buyout. * 1994: Xerox Corp. awards EDS a 10-year, $3.2-billion contract to manage its information technology operations. EDS and Sprint Corp. abandon merger talks. * June, 1995: EDS agrees to buy Chicago consulting firm A.T. Kearney for $300 million. * Aug. 7, 1995: GM says it will spin off EDS through an exchange of EDS stock for shares of GM Class E stock that have a market value of about $22 billion.
Sources: Associated Press, Times reports
Steady Climb
Electronic Data Systems’ revenue and profit have grown steadily since General Motors acquired it in 1984.
REVENUE
In billions of dollars:
1994: $10
EARNINGS
In millions of dollars:
1994: $822
Source: Company reports
