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.

Start your day with The Independent, sign up for daily news emails
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Ashdown Group: Marketing Services Manager - (communications, testing, DM)

£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

Guru Careers: Finance Account Manager

£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas