CSC Loses Out to EDS on Military Intranet Contract
Computer Sciences Corp.’s hot streak turned cold Friday when a $6.9-billion contract to build a computer intranet for the U.S. Navy and Marine Corps went to rival Electronic Data Systems.
Many observers considered El Segundo-based Computer Sciences the front-runner for the five-year contract, the largest technology outsourcing contract ever awarded by the military. CSC is consistently among the top contenders for such military contracts.
Investor optimism helped push CSC’s stock Friday on the New York Stock Exchange. The company’s shares rose $5.31 to close at $77.06. But the contract was awarded after the market close, and CSC’s shares gave back $6.06 in after-hours trading, falling to $71.
“Everyone expected CSC to win it,” said Andy Burns, an analyst with PaineWebber in San Francisco.
Computer Sciences officials declined to comment Friday on the loss. But analysts said CSC’s failure to win the Navy-Marine Corps intranet contract won’t diminish the company’s prospects for other upcoming contract awards. Most Wall Street analysts base their CSC growth projections on an assumption that the company will win only 50% of the contracts it competes for, which Burns described as “conservative.”
“It doesn’t hurt them one iota,” said Merrill Lynch analyst Stephen McClellan. “They’ve been on quite a tear winning contracts in the last six to 12 months. They have a lot of momentum.”
In the first half of its 2001 fiscal year, Computer Sciences has won contracts worth $8 billion, including a $3-billion deal to provide technology support services to telecommunications equipment maker Nortel Networks and a $1-billion deal to manage the software that runs AT&T;’s billing, customer care and other customer-service systems. Last year, CSC announced a total of $11.3 billion in new contracts.
CSC is still in a strong position to win upcoming technology outsourcing contracts from the Army and Air Force because they are not likely to be awarded to the same company that is building the intranet for the Navy and Marines, said one New York-based analyst.
Navy and Marine officials said the new intranet system being built by Plano, Texas-based Electronic Data Systems will give 360,000 users quicker and easier access to data in several forms.
For instance, shipboard physicians will be able to confer with colleagues at Bethesda Naval Medical Center in Maryland via video teleconference. A Marine Corps intelligence officer trying to plan the evacuation of U.S. personnel from a war zone in the Pacific will be able to access classified State Department and Defense Intelligence Agency files. And a crew member on a surface ship would be able to tap a worldwide database of Navy spare parts to find the nearest location for a needed radar component.
Before the contract winner was announced, Electronic Data Systems’ shares fell $1.44 to close at $40.63 on the NYSE. In after-hours trading Friday, they jumped to $47.50, a 17% gain.
Although the Internet itself was developed using Pentagon research and development money, the military today uses technology that is often remarkably outdated.
It also has a history of developing its own computer networks from scratch. The Navy operates 200 separate networks, all of which will be replaced by the new EDS-built intranet, said Navy Secretary Richard Danzig.
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Kaplan reported from Los Angeles and Richter reported from Washington, D.C.
