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Computer colossus looks to life after spin-off from GM

Investors are betting that EDS will go shopping in the telecoms market. David Usborne reports from New York
The frequently tumultuous, 12-year marriage between General Motors and Electronic Data Systems (EDS) - the computer outsourcing colossus founded in 1962 by the Texas billionaire Ross Perot - is almost over.

Shareholders in GM are expected to approve the spin-off of EDS within the next few weeks in a deal that will value the company at $25bn (pounds 16.5bn) and establish it as the largest computer systems management and consulting enterprise in the world. In Britain its myriad client list includes the Inland Revenue, Scotland Yard and Rolls Royce Aerospace "The current thinking is that it will be done within June,'' said a London based spokesman for EDS.

Freed of its conjugal ties to GM, EDS is not expected to linger before expanding its horizons, including through joint ventures and acquisitions. The company, which will retain Les Alberthal - also a Texan and one of Mr Perot's original lieutenants, as its chairman and chief executive - is likely to be especially attracted to telecommunications companies. In recent years it has had brief but ultimately fruitless courtships with Sprint of the US and British Telecom.

Mr Perot, best known for his independent candicacy in the 1992 US presidential race, created EDS with a $1,000 investment in 1962. The firm gained noteriety from the Texan's fabled insistance on a strict dress code for his employees. He once launched a dramatic rescue of EDS workers captured in Iran and also retained the right to investigate the private lives of those who worked for him. Anyone found to be "living in sin" was shown the door.

Mr Perot made himself into a paper billionaire by taking EDS public just four years after its creation. Then in 1984, GM scooped up EDS for $2.5bin believing it would help turn it into the car company of the future. The relationship quickly soured, however. When boardroom bickering between Perot and the then GM chief executive, Roger Smith, erupted into all-out war in 1986, GM was finally compelled to pay Mr Perot $700m just to go away. Refusing to leave quietly, Mr Perot said that the payment was a rip-off for GM shareholders. He subsequently set up a rival firm, Perot Systems. When EDS threatened to sue him, charging that he had breached an agreement not compete with it, he retorted: "I'll rip their heads off." Mr Perot abandoned his interest in Perot Systems in 1992 to pursue his White House ambitions.

Under GM's wing, EDS none the less flourished, increasing its market value ten times. Still at its original base in Plano, Texas, the company now has 95,000 employees with offices in 24 countries. Its core business, which Mr Perot himself pioneered, remains the signing of multi-year outsourcing contracts with companies and governments to integrate and manage their Information Technology systems and, in many cases, take responsibility for the running of their payroll, telephone services, billing, accounting and customer-service departments. With the acquisition a year ago of Chicago- based A T Kearney, EDS has also been expanding into more general management consultancy. In 1995, the company reported earnings of $938.9m.

In Britain, EDS bought SD-Scicon, the computer systems house, in 1991. It made its biggest splash in 1994, however, by winning a ten-year, pounds 1bn, contract to revamp and run the computer systems of the Inland Revenue and absorb the 2,000 employees in the department's IT office on to its own payroll. It is a project made more complicated by the changing tax assessments systems since introduced by the Government. EDS has similar contracts with the Department of Social Security, the Vehicle Licensing department in Swansea and the Metropolitan Police. More recent, was the signing of a 10-year, pounds 600m contract with Rolls Royce Aerospace.

Granted a tax-free status by the US tax authorities, the EDS spin-off will be achieved by a one-for-one exchange of existing GM Class E shares, which represent EDS earnings, for new common stock in EDS. Final approval of the spin-off was agreed by the GM board in early April. The new shares will be traded in both London and on the New York Stock Exchange. "They are getting a divorce after all these years," noted Maryann Keller, a car industry analyst with Furman Selz. "But they will both be happier and better off as a result."

"It will give us a freedom to determine our own destiny and to form new business initiatives more easily, given our access to our own common stock," Mr Brown of EDS remarked. "It should also open up new markets that have been blocked until now by the parentage of GM, epecially in the automotive industry." As part of its effort to broaden its outlook and raise its profile ahead of becoming independent, EDS has named several well-known new outside directors to its board, including James Baker and Dick Cheney, respectively former US Secretary of State and Secretary of Defence under President Bush.

Under the spin-off deal, EDS will pay GM a one-time alimony dividend of $500m. Relations between the companies will remain close, however. GM has agreed to continue to use EDS for at least 10 years, although it will be free to seek outside bids form EDS rivals. Contracts with GM currently account for almost one-third of EDS's $12.4bn in revenues. "It's still the largest outsourcing contract known to man," Mr Alberthal recently commented. Even so, EDS expects earnings in 1996 to drop by as much as half, in part because of reduced revenue from GM. It also recently acknowledged plans to lay-off about 5,000 of its workers as a result of the spin-off.

The most urgent question for investors and analysts, however, is how fast EDS will go shopping for other companies and where it will begin. A first bet would have to be the telecommunications sector. "We're not going to rule anything out," remarked Gary Fernandes, who is earmarked to be a vice-chairman of EDS after the spin-off, when asked recently about the possible acquistion of a US "Baby Bell" regional telephone company. "I can assure you we we are in the market looking for opportunities."