GM Board OKs Divestiture of Electronic Data Systems Unit
General Motors Corp.’s board of directors Monday approved the spinoff of its huge Electronic Data Systems unit, bringing the two companies just a small step away from ending their rocky 12-year-old marriage.
The deal would create the world’s largest independent computer services company with a market value of more than $25 billion. That is 10 times what EDS was worth when GM acquired it in 1984 for $2.55 billion from Texas entrepreneur Ross Perot.
The spinoff, which still must be approved by shareholders, would be done as a one-for-one stock swap of GM E shares for new EDS shares. In addition, EDS will make a one-time payment of $500 million to GM. The IRS has ruled that the transaction will be tax-free to shareholders, GM said.
Plano, Texas-based EDS also said Monday that it will take a $500-million to $750-million restructuring charge in the second quarter related to the elimination of up to 5,000 jobs through early retirements and layoffs. However, hiring elsewhere in the company will keep total employment about the same, EDS said.
GM has been considering the divestiture of EDS for more than two years. Previous deals to sell all or part of the subsidiary to Sprint Corp. and British Telecom fell through.
“They are getting a divorce after all these years,” said Maryann Keller, an auto analyst for Furman Selz Inc. “But they will both be happier and better off as a result.”
When the spinoff is complete, it will end one of the most tumultuous chapters in GM’s storied history. The EDS-GM relationship has been described as one of GM’s most successful failures.
Early on, it was highlighted by clashes of cultures and egos. Perhaps most memorable was the public bickering between then-GM Chairman Roger Smith and EDS founder Perot, whom GM ultimately paid $743 million to resign from its board.
EDS brought billions of dollars in profit to GM. But the data services firm itself was never able to achieve its full potential under the thumb of its overbearing, financially struggling parent, critics said.
Meanwhile, under 10-year contracts negotiated in the mid-1980s, EDS charged GM higher rates than outsiders would have for some work. More important, EDS never quite delivered on the unrealistic promise of making GM the car company of the future.
With the spinoff, EDS gains greater flexibility to raise cash for expansion and to develop new alliances and customers--for example, other auto makers. And GM can demand more competitive rates for the computer services it buys from EDS.
“An independent EDS will have much greater flexibility to enter new markets, forge new alliances and offer a wider array of capabilities to its customers,” said EDS Chairman Les Alberthal in a statement.
On Wall Street, GM’s stock closed up $2.875 at $56.75 in trading on the New York Stock Exchange, while that of GM E, a class of GM stock that reflects EDS’ financial performance, closed down 25 cents at $56.75.
The agreement provides that EDS will continue to serve as GM’s principal supplier of information technology services, and EDS also was awarded additional GM contracts related to factory automation. But the auto maker will demand better rates than in the past.
As a result, EDS said revenue generated from services performed for GM will decline this year, reducing 1996 earnings by as much as 14 cents a share. The firm also said it could incur spinoff-related costs equal to another eight cents a share.
EDS earned $939 million, or $1.96 per share, on sales of $12.4 billion last year.
“There is some uncertainty in the impact on earnings for EDS,” said Marie Rossi, a high-tech analyst for Dean Witter. “But this is the cost of independence.”
The restructuring is not connected to the spinoff from GM, Alberthal said, but is being done to improve the company’s competitiveness. EDS is implementing a voluntary early retirement program for 2,800 workers and could lay off up to 2,200 more.
However, the company said employment is expected to stay at about the current level of 95,000 workers as it expands and hires new people with specific skills for the new areas EDS enters.
