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Analysis of Electronic Data Systems Fourth Quarter Business Results

“Hot Air Jordan” Flaunts Flop as Feat

EDS Flounders Under New Leader, Loses $1.7 Billion in 2003

PHOENIX, February 6 – When Michael Jordan was in his prime as an all-star NBA player, appreciative fans and media dubbed him “Air Jordan.”  The nickname reflected his outstanding leaping ability.  Now another Michael Jordan is emerging on the business stage who deserves a similar epithet.  Electronic Data Systems’ (EDS) CEO may end up being known as “Hot Air Jordan” - for his ability to spew out hot air over his company’s red ink.  While EDS is floundering, Jordan is flaunting the biggest flop in its corporate history as a feat.

“Our fourth quarter results, excluding NMCI[1], met expectations,” he said in a statement that accompanied the February 5 release.  “We completed our management team, and solidified our technology and marketing strategies.”

If the free flow of red ink in the quarter “met expectations,” Jordan must be setting at least one new record – for rock bottom expectations!  Consider some highlights…


Like IBM of Old, Like EDS under Jordan…

What’s happening now at EDS is reminiscent of what occurred at IBM in the waning years of the John Akers administration (1990-1992).  The Big Blue emperor sat in his Armonk ivory tower, and kept issuing optimistic proclamations divorced from reality of the state of the IBM business.

The IBM board did nothing, complacently backing the CEO until the bottom fell out of the stock.  Then it was each man for himself.  The IBM directors finally fired their hapless CEO, but not before most of the value had evaporated from the IBM stock (from $30 to $11 in today’s prices).

Does such a fate await EDS? 


Business Segment Analysis

Geographies & Industries.  The EDS market share losses are particularly discernible in the U.S. market, its biggest geographic region.  A year ago, the U.S. market represented a whopping 75% of the EDS new contracts.  In the fourth quarter of 2003, however, its share plummeted to a mere 47% (see the chart).


Horizontal LOBs.  Among EDS’ horizontal lines of business, outsourcing, its biggest LOB that accounts for 61% of the total revenues, was up 8% in the fourth period.  The growth was largely due to the U.S. Navy contract’s 65% surge (which we’ve already explained are “bad revenues,” as they bleed red ink to the bottom line).  


Fixing What’s Not Broken

Amid slumping sales, EDS’ Jordan said last October that his goal was to have a 7% SG&A expense-to-revenue ratio (see “Pain Without Gain,” Oct 2003).  And in the course of pursuing it, he has slashed about 5,200 jobs, and is planning to export many more, mostly to India.  (EDS has predicted it would have 20,000 employees providing offshore IT services in various countries by the end of 2004, according to a Dow Jones July 22, 2003 report - see “A Passage to India,” July 2003).

That’s fixing something that’s not broken, as we also said back in October: 



So what’s in the cards for EDS?  Struggle to keep its chin above water. 

And what if it doesn’t?  Then somebody will buy it – probably at a stock price significantly lower than it is today. 

Who might that be?  Perhaps somebody who is already in the IT services business, has the money to acquire a $20+-billion company, and has proven that it can digest mega-acquisitions successfully.

If giving you an extra clue - that such a company’s name is a two-letter acronym is not enough, maybe we can hint that this vendor is headquartered in California, and is led by a female CEO.  And if that’s not enough, well, ask Michael Jordan who he thinks his major competitor is.  If he says LA Lakers, you’ll know what time it is…. time to head for the hills.  But if he replies Big Blue, then pick that competitor’s major competitor. 

Happy Pickings!

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (12 pages in print edition), along with all charts which back up our story.

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Happy bargain hunting!

Bob Djurdjevic

[1]  The U.S. Navy and Marine Corps Intranet contract

For additional Annex Research reports on EDS, check out... 

2004: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); "Cronyism Is Alive and Well at EDS" (Jan 2004);  "Five Most and Least Likely Forecasts for 2004" (Jan 2004)

2003: “Biggest Feather in Cap’s Cap,” (Dec 2003); "Pain without Gain" (Oct 2003), "EDS CEO Replaced" (Mar 2003);  Rebuilding Trust and Confidence (Feb 2003)

2002: Wall Street Legal Vultures Descend Upon EDS (Sep 27, 2002),  EDS Issues Earnings Warning (Sep 18, 2002),  Wall Street-Main Street Chasm Widens (July 3, 2002),  Analysis of EDS 4Q01 Results (Feb 8, 2002)

A selection from prior years: Annex Research Analysis of EDS 4Q00 Results (Feb 7, 2001),  EDS Takes Over US Navy (Oct. 10, 2000),  EDS Second Quarter Results (July 28, 2000),  Annex Bulletin - 2000-02 (EDS' e-Price Clubs).

Or just click on and use "financial engineering" or similar  keywords.

Volume XX, Annex Bulletin 2004-04
February 6, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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