Analysts Say EDS's Earnings Will Benefit From MCI WorldCom Pact
February 11, 1999 4:21 PM
NEW YORK -(Dow Jones)- Electronic Data Systems Corp.'s plan to buy
a computer services unit from MCI WorldCom Inc. isn't expected to
immediately shake up competition in the services industry, but it could
give a nice jolt to the computer service company's profits, analysts said
Thursday.
In Thursday trading, EDS shares (EDS) advanced $2.375, or 5.2%, to
settle at $48.25.
EDS has agreed to acquire MCI WorldCom's Systemhouse unit for $1.65
billion in cash, as well as to sign broader alliance and services
outsourcing contracts - worth up to $7 billion for EDS - with MCI
WorldCom (WCOM). In 1998, Systemhouse had revenue of $1.7 billion.
As part of the deal, EDS will provide services to maintain MCI's software
systems and manage its computer operations.
Merrill Lynch analyst Stephen McClellan estimated the Systemhouse
acquisition and its outsourcing contract with MCI WorldCom might add
up to 10 cents a share to EDS' 2000 earnings and possibly boost
earnings this year. The mean estimate of analysts surveyed by First Call,
before the announcement, was for earnings of $1.88 a share in 1999 and
$2.16 a share in 2000. For fiscal 1998, EDS reported earnings of $1.70,
excluding items.
EDS has been struggling to jump-start its earnings since 1996 - the last
time it reported year-over-year profit growth. But under the leadership of
Chairman Dick Brown, who officially joined the company last month,
analysts have high hopes that he will get the bottom line moving up
again.
Brown, who has a reputation for taking bold steps to revitalize
companies, last was chief executive of Cable & Wireless PLC (CWP). At
EDS, he is anticipated to try to turn around the company through steps
including cost cutting, acquisitions and alliances. Sources say the EDS
held talks with MCI before Brown's arrival, but the chairman put his
imprint on the deal.
MCI Systemhouse was a sluggish grower and therefore not viewed as
near-term threat to other EDS competitors, such as Computer Sciences
Corp. (CSC). But EDS's broader deal with MCI WorldCom gives it an
edge in certain services contracts, said ING Baring Furman Selz analyst
Brian Maimone.
EDS and MCI plan to market each other's services in outsourcing
contract bids. EDS would provide systems integration and other services
while MCI could furnish customers with communications and network
services. Both firms plan to market each other's services, but the
relationship isn't exclusive.
The agreement shows that telecom companies no longer think of
themselves as one-stop shops that can provide unlimited technology
services, said Pascal Aguirre, a principal in the business strategy group
of Renaissance Worldwide Inc. Telecom companies are realizing that
they should focus on their core-communication network skills, while
delegating computer technology services to companies specialized in
those areaa, Aguirre said.
Brown is expected to provide more financial details on the company's
deals with MCI, as well as his strategy for revitalizing the company April
29 - the day slated for EDS' Wall Street analyst meeting in New York.
By acquiring Systemhouse, EDS continues to shift its business away
from its troubled contract with major customer General Motors Corp.
(GM), McClellan said. The addition of the unit could lower GM's
contribution to EDS' revenue to 19% this year, down from a previously
estimate 21%, he said.
EDS, which spun out of GM in 1996, has been struggling with its GM
contract. GM has been reducing its spending on the contract at the
same time that EDS has been trimming contract costs to improve
profitability. The contract's margins are said to have stabilized last
quarter. The GM contract accounted for 24.8% of EDS' $16.9 billion in
1998 revenue.
EDS expects its acquisition of MCI Systemhouse and the outsourcing
contract and alliance with MCI to be finalized by May. Under the terms of
its agreement with EDS, MCI is transferring 12,000 of its employees to
EDS.
While EDS has partnered with telecom companies before, its MCI
relationship is more strategic, according to the company. EDS hopes to
leverage MCI's leadership as the provider of the largest Internet backbone
network into opportunities to sell electronic commerce services.
As part of its agreement, EDS awarded MCI a 10-year contract worth $6
billion to $8.5 billion for MCI to run EDS' global network. The network
handled EDS' data, voice and video communication needs and was used
to support the computer services company's outsourcing business.
EDS didn't disclose by how much it will cut its costs by outsourcing its
network's operations to MCI. In typical outsourcing contracts, companies
expect to save 15% to 20%, Maimone said.
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