EDS becomes cash conscious, scales back on megadeals

Jon Herskovitz

PLANO, Texas: Electronic Data Systems Corp., the world's No. 2 computer services company, said it will be more selective about which long-term, big-money deals it pursues as it tries to protect its cash position. Separately, the company saw its second credit rating cut in two days as Moody's Investors Service downgraded EDS and warned the company was on review for a further cut.

In a move expected in the market, Moody's said it cut EDS' unsecured rating two notches in the medium investment grade category to A3 from A1, citing various factors such as weak sales prospects and concerns over its cash flow. The credit rating agency also cut EDS' short-term debt rating to Prime-2 from Prime-1.

Stephen Smith, the company's chief sales officer, said so-called "megadeals" remain a cornerstone for the company, but the sales staff will be more selective about where it will concentrate its efforts as it looks to deals where it has a higher probability of landing the contract. "We are going to continue to pursue megadeals as a driver of our strategy for this corporation for growth. We are just going to be more precise and selective in the ones that we pursue," Smith told Reuters.

"We are going to be more conscious and protective of our cash position," Smith said. Smith said the company has been trying to land about 90 of the megadeals, which he defined as having a contract value of $250 million or more. The number of megadeals it pursues could be cut in half with a realigned sales force.

Hurt by Worldcom, US Airways bankruptcies

In recent weeks EDS has lost out on some of the mega deals that have been its bread and butter, with J.P. Morgan Chase & Co. selecting IBM for a sweeping technology contract worth over $5 billion. EDS took another hit when consumer products conglomerate Procter & Gamble Co. decided against exclusively contracting with the company for its back office services like payroll, saying instead it would outsource the operations to several partners.

EDS recently announced two major deals, however, but they are not with companies that command the same stature and boast the same finances as J.P Morgan and P&G. EDS was slammed in recent weeks after issuing a surprise earnings warning in September, saying that business had dried up, particularly after two big clients, WorldCom Inc. and US Airways, filed for bankruptcy.

EDS shares have fallen by about two-thirds from $43.60 in late August. On Wednesday on the New York Stock Exchange, EDS shares closed up 82 cents, or 4.7 percent, to $18.17. Analysts have criticized EDS for pursuing big-dollar deals at the expense of cash flow and profits and without regard to the company's current financial position.

The company still managed to post a profit during the third quarter, of $86 million, or 18 cents a share. But this was much lower than the 44 cents a share in the year-ago period, and far short of the 74 cents a share analysts had expected at one point.

In its downgrade, Moody's said EDS' exposure to troubled companies in the airline sector and failed telecom WorldCom weakened its prospects. Moody's said it will review contract quality as it decided if it will further cut EDS' rating. On Tuesday, Standard & Poor's cut its ratings on EDS, saying the computer services company will have difficulty boosting revenue and profit as customers spend less.

Ratings downgrades often increase borrowing costs, and the commercial paper downgrade may make it more difficult for EDS to sell unsecured debt maturing within nine months. Adam Frisch, an analyst with UBS Warburg, said that the market had anticipated the cuts in credit rating.

"If anything, people expected it to be worse," Frisch said, adding that the cuts are still bad news for the company because both agencies left a negative outlook. This means there is a greater than 50 percent chance they will cut again. Plano, Texas-based EDS, plans to cut up to 4 percent of the company's work force, about 5,500 jobs, cut overheads and sell off some non-core assets.

(With additional reporting by Jonathan Stempel)

© Reuters