GM's computer giant ready to go it alone

Tax-free share exchange will give Electronic Data Systems the freedom to make its own way
General Motors, the US car manufacturer, announced yesterday that it plans to split off its Electronic Data Systems subsidiary in a tax-free exchange of stock to GM shareholders.

The move will make the computer services giant an independent, publicly listed company, which EDS management believes will give it more flexibility in competing in the fast-growing computer services market.

EDS, which does a lot of business in the UK, was acquired by GM for $2.5bn in 1984. The seller was the company's founder, Ross Perot, who later shot to worldwide fame with his run for the US presidency in 1992. EDS is a leader in providing computer services to large corporations, which are increasingly outsourcing functions such as payroll to specialised third parties. EDS is big in areas such as processing claims on behalf of insurance companies, helping operate reservation systems for airlines, cheque processing on behalf of banks, and dealing with the mountains of paperwork generated by both public and private health services.

EDS is a key player in the European computer services market, and 15,000 of its total 80,000 staff work in Europe. Clients include Lufthansa, Saab and Xerox. Earlier this year EDS signed a 10-year cheque-processing deal with the Royal Bank of Scotland. Last year EDS added the UK Inland Revenue to its client list, with the signing of a 10-year, pounds 1bn computer services contract.

Last year EDS made profits of $822m (pounds 514m) on total revenues of $10bn.

Some 35 per cent of this revenue was provided by GM, which is by far the largest customer for EDS services, outsourcing functions ranging from computer control systems for its car factory paint-sprayers to personnel records and payroll. A statement yesterday said that "in the event of a split-off GM and EDS would enter into a long-term agreement in which EDS would provide substantially the same information technology and other services for GM that it does today."

Several complications have yet to be resolved with regard to the terms of the split-off, including clearance from the US Internal Revenue Service to clear the deal as a tax-free exchange of stock. Under US tax law stock swaps are often tax-free, whereas in a cash deal GM would be taxed on its capital appreciation on the value of EDS. General Motors envisages an exchange of new EDS shares for General Motors Class E shares, which are closely linked to the performance of the EDS division and trade separately on the New York Stock Exchange under the ticker-tape symbol GME, alongside the main parent company shares. A large number of GME shares are owned by the pension fund for GM auto workers.

Yesterday's announcement followed a meeting of the GM board, which approved a recommendation by GM and EDS management to develop specific terms for the split-off. GM said yesterday that the various approvals involve numerous uncertainties, although the spin-off could occur in the first half of 1996. Yesterday the class E shares rose $3.375 to $47 in early trading, which on the basis of a one-for-one exchange would place a market capitalisation of around $22.7bn on the new, independent, EDS.

The market has been anticipating some sort of demerger of EDS for some time. Last year EDS was considering a link-up with the long-distance telephone company Sprint, but those talks fell through. GM management subsequently publicly aired the idea of spinning off EDS, which is currently a wholly owned subsidiary.