Sprint ends talks on EDS merger

June 07, 1994|By New York Times News Service

Sprint and Electronic Data Systems announced yesterday that they had broken off their merger talks, explaining that the two companies had been unable to agree on financial terms.

But behind the scenes, recent contentious letters exchanged by Sprint's and EDS's top executives indicate that mutual deeper differences may have helped scuttle the deal.

General Motors, corporate parent of the computer services company EDS, indicated yesterday that it was still willing to spin off the unit, even though EDS will not be merging with Sprint.

The developments are the latest chapter in a complicated story that began with serious discussions about six months ago between Sprint Corp., the nation's third-largest long-distance company, and EDS, one of the world's largest providers of computer services to corporate customers. The two sides announced a proposed "merger of equals" on May 16.

But on May 27, executives of Sprint reportedly shocked their EDS counterparts with the demand that Sprint shareholders get 1.3 shares of the new company for every Sprint share. EDS had sought a lower value for Sprint's stock -- 1.1 shares of the new company for each Sprint share.

On June 1, Lester Alberthal Jr., chief executive of EDS, and John Smith Jr., GM's chief, responded with a "Dear Bill" letter to William Esrey, chairman and chief executive of Sprint, accusing him of making a proposal that "ignored the very principles of a merger of equals."

Mr. Esrey responded in kind, writing a "Dear Les and Jack" letter dated June 3 that said the use of current trading prices to determine an exchange ratio would be "naive." The letter went on to say that relative market prices also failed to reflect "the potential adverse impact" on the trading price of EDS's stock as a result of "nonpublic information that has come to our attention" -- a mysterious reference that implied serious problems at EDS.

Neither company yesterday would explain what this nonpublic information may have been.

Gary Fernandes, a senior vice president at EDS, said yesterday that his company had been baffled by the reference in the letter and said he rejected categorically "that there's any material, nonpublic information about EDS that would result in a lower market valuation."

At Sprint, J. Richard Devlin, general counsel for the company, declined to elaborate on what, if anything, Sprint discovered about EDS that would cause it to make the statement in the letter.

"I don't think there should be any implication that EDS did anything wrong or improper," Mr. Devlin said.

In trading yesterday, Sprint lost 87.5 cents, to $38, while the GM Class E shares lost 25 cents, to $35, and GM lost $1, to $51.

The debacle adds to the reputation of EDS as a unit that GM cannot unload. Management of EDS has been itching to get out from under the wing of GM, and perhaps join forces with another information-based company, but the company and its parent have been frustrated in their attempts to make EDS a free-standing company.

It was only a year ago that GM and EDS broke off talks with British Telecommunications PLC, which had been considering a 25 percent stake in EDS stock, which trades as Class E shares of GM. These shares do not represent actual ownership of EDS but pay dividends to investors based on the earnings of EDS. This arrangement has made it difficult for GM to divest itself of EDS.

Mr. Fernandes of EDS implied yesterday that it was most likely that the company would still be spun off. But he acknowledged that the ownership arrangement between GM and its subsidiary had made a sale of EDS problematic.

Talks between Sprint and EDS, involved creating an information services powerhouse that would have had $19 billion in annual revenues, $20 billion in assets and 120,000 employees.

GM was to have spun off EDS in a tax-free transaction that would have saved it millions if the Internal Revenue Service gave the nod. After the spinoff, shareholders of both companies would have voted on a merger.

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