Can the Buddy System Boost EDS?


By Andrew Park Could a longtime pal hold the key to the turnaround of Electronic Data Systems? CEO Mike Jordan thinks so. On Jan. 12 he said EDS would shell out $89 million in cash and stock for a privately held consulting firm run by longtime info-tech executive Charlie Feld. Feld, who has known Jordan since both were top executives at Frito-Lay in the 1980s, also was tapped to become EDS's executive vice-president in charge of portfolio management. And one of Feld's lieutenants, Steve Schuckenbrock, was named executive vice-president for global sales and client solutions.

With these key management vacancies filled, Jordan will be expected to deliver better results for EDS (EDS) in 2004. "All the reshuffling is done," says analyst David Garrity of American Technology Research (ATR), who believes EDS shares can hit $35 within 12 months, a 49% jump over the Jan. 13 closing price of $23.55. "As the economy continues to recover," Garrity says, "EDS should be recovering along with it."

Jordan, who took over EDS in March after Richard "Dick" Brown resigned the top post, has told investors not to expect a quick turnaround, and so far they're heeding his caution. The stock has traded in a narrow range the past few months. Says Jordan: "We view '04 as a building year and hope to come out of the year with some very solid momentum."

SWINGING THE AX. EDS has its work cut out for it. On Feb. 5, it is expected to report fourth-quarter earnings of $53 million on sales of $5.4 billion, vs. net income of $246 million a year ago, according to First Call. For the entire year, which was marked by lackluster sales, restructuring costs, problem contracts, and a major accounting change, analysts anticipate profits to fall 79%, to $230.6 million, and revenues to be off about 1%, to $21.4 billion.

The progress may look puny, but Jordan has been busy. He has sold off noncore assets and begun eliminating 5,200 jobs, or about 4% of EDS's workforce. In June, he secured $1.8 billion in new debt to address liquidity concerns caused by a decline in cash flow under Brown.

And in October, EDS changed the way it accounts for long-term outsourcing contracts, which investors had criticized as confusing because the method allowed EDS to book revenues before it had collected them. The change meant EDS had to take a $2.2 billion charge and revise results for the first two quarters of 2003.

REPAIR SHOP. Bringing in Feld could be equally dramatic. At Frito-Lay, and later as a for-hire chief information officer for companies such as Coca-Cola (KO), Delta Airlines (DAL), and PricewaterhouseCoopers, Feld earned a reputation for successfully revamping the IT operations of struggling corporations. Jordan is looking to him to reshape EDS's lineup of outsourcing services.

A key challenge for Feld will be to better target key niches in the market where EDS lags behind rivals such as IBM (IBM) and Accenture (ACN), including utility computing and business-process outsourcing. "As Charlie said, 'We fix IT shops, and you're a damn big IT shop,'" says Jordan.

Schuckenbrock, whose background is also as a CIO, might have the tougher job: reviving EDS's sales. While Jordan has been working hard to convince prospective customers that he's righting the ship, EDS was virtually shut out of major deal signings in 2003. And it suffered a big blow in December when it lost a $5 billion contract with the British government to Cap Gemini Ernst & Young after holding it for nearly 10 years. EDS's financial woes have been "a check mark in the risk column," says Gartner analyst Lorrie Scardino.

TOO CLOSE FOR COMFORT? ATR's Garrity expects bookings in the fourth quarter to total between $2.5 billion and $3 billion, down from $8.1 billion a year ago and $10.1 billion the year before that. He says EDS should benefit from greater confidence among customers in 2004, as well as from an uptick in corporate spending on IT, specifically, major outsourcing and software-development projects.

Some competitors are already seeing an improvement. On Jan. 13, Accenture reported fourth-quarter contract signings of $5.1 billion, a 100% improvement over last year.

Critics chide EDS for the price it paid for Feld's company -- more than triple its 2003 revenues of $27 million -- and for Jordan's close ties with Feld, who will receive $3.2 million in EDS shares. A venture-capital firm that employs his nephew will receive $37 million in cash and $7 million in stock and options.

Yet for EDS, which says its board vetted the transaction with an outside consultant, the bigger issue will be whether the deal pays off in the form of higher sales and better execution. Otherwise, Jordan and Feld may wish they had remained just friends. Park covers EDS from BusinessWeek's Dallas bureau


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