GM board OKs spinoff of Perot's creation EDS paying $500 million to regain independence

April 02, 1996|By BLOOMBERG BUSINESS NEWS

DETROIT -- General Motors Corp.'s board yesterday approved a spinoff of Electronic Data Systems, ending an uneasy 12-year marriage and freeing the computer-services business to hunt for acquisitions.

EDS, founded in 1962 by Dallas billionaire Ross Perot, said the spinoff will result in the elimination of up to 5,000 jobs, including 2,200 firings, in the next few months.

Plano, Texas-based EDS agreed to make a one-time payment of $500 million to GM, less than some analysts predicted that it would cost to break free from the nation's biggest automaker.

GM said it will use EDS for most of its data-processing in the next 10 years and retain the right to seek bids for some computer-service contracts.

"EDS will win the ones they want and leave the ones they don't," namely the less lucrative of GM's contracts, said Graham Kemp, president of G2 Research in Mountain View, Calif. "There's nobody on this planet that can duplicate to GM their internal knowledge."

EDS executives worked toward becoming independent for more than seven months. Industry executives had said for years that GM's corporate structure limited the computer-services company from expanding through acquisitions and alliances. That's one reason that EDS' stock will be worth more as an independent company, analysts have said.

"It gives EDS access to its own cash flow [and] that means EDS will become much more active in the acquisition arena," Mr. Kemp said. "The growth rate for EDS is going to sharply increase."

This year, however, the loss of some contracts is expected to cut into EDS' revenue from GM.

Lower sales to GM will reduce 1996 earnings by 7 cents to 14 cents a share, including about 3 cents in the first quarter, EDS said.

The company expects another 8 cents a share of charges related to the spinoff, including 3 cents for interest expenses.

EDS is expected to have a close working relationship with GM, while gaining the freedom to use expertise developed under GM to bid on work from other automakers. Mr. Kemp said.

The GM business amounts to the world's largest computer services contract.

The second-quarter charges at EDS, which earned $938.9 million last year, are related to a restructuring EDS began in preparation for the spinoff, said company spokesman Tony Good.

The spinoff is subject to approval by shareholders.

GM's Class E shares, which represent EDS, fell 87.5 cents to $56.125 yesterday. GM's common shares rose 2.875, to a 22-month high of $56.125.

Pub Date: 4/02/96

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.