Businessweek Archives

Is Eds Getting Gussied Up For A Suitor?


Inside Wall Street

IS EDS GETTING GUSSIED UP FOR A SUITOR?

Watch the sparks coming from the red-hot shares of Electronic Data Systems, a General Motors subsidiary acquired from Ross Perot in late 1984. They may be signaling big changes up ahead that could yield a bonanza for shareholders of both GM and EDS. Trading on the Big Board with the symbol GME, the stock blasted to 36 on Apr. 19, up from 26 in early December--in the face of a stock-market funk.

What's driving it up? The betting is that GM intends to sell a minority chunk of EDS, a maker and operator of data-processing and communications systems, to a potential strategic partner. The word is that several telecommunication giants are interested, including AT&T, British Telecom, and Sprint, the long-distance company that, says one New York money manager, is the "latest entry seeking to buy a stake in EDS."

GM owns 185 million shares, or 42%, of the Class E, or GME stock. But it faces huge capital-gains taxes if it simply sells the stock to a third party. The idea is to get the stock into GM's pension fund and then have the fund handle a deal. And some big investors who own sizable blocks of both GM and GME say the carmaker has been "clearing the deck" to do just that. In November, GM announced that it was seeking regulatory approval to transfer and contribute GME shares to its employee pension fund, which now is underfunded.

FAT CONTRACT. GM expects to get the green light from the Labor Dept. and the Pension Benefit Guaranty Corp., which would let it temporarily exceed the limits on the amount of employer securities a pension fund may hold. GM is also asking the Internal Revenue Service for relief from paying taxes on the excess contributions to its pension fund.

Once these are approved, the pension fund could sell the stock to a strategic partner. The sale of a big slice could well mean the buyer would award EDS a large contract for its data services.

That would be a big plus for GM as well as GME, since GM will continue to own all the assets of EDS, and it remains a major customer: GM business accounts for 38% of EDS revenues. GME shareholders have only indirect rights in the equity and assets of EDS through an ownership stake in GM. But GME holders participate in EDS profits through dividend payouts.

One large GME investor says that bringing in a new EDS stakeholder could boost the stock to the high 40s because of the beneficial effect on earnings--and possible future deals. Analyst Cathy Baker of Cowen & Co. in Boston is bullish on GME: Her earnings estimate for 1995 is $2.05 a share, up from an estimated $1.74 in 1994. Spokesmen for EDS, AT&T, and Sprint all declined to comment.GENE G. MARCIAL


Ebola Rising
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus