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A SPECIAL ANNEX NEWSFLASH

Stock Rises on News of Possible Additional, Bigger Layoffs

Updated 9/29/04, 8:50 A.M. PDT (adds "The Manana Recovery")

EDS to Cut Up to 20,000 More Jobs

Former Insiders Stunned by CEO's Remarks

PHOENIX, Sep 12 - By now, most people who follow EDS have heard the latest news initiated by its CEO, Michael Jordan.  Seeking to reassure the company's jittery investors always hungry for cost cuts, Jordan said in New York on Thursday (Sep 9) that the company may jettison up to 20,000 additional jobs in an effort to take out another $3 billion out of its cost structure.  

What followed was a flurry of media reports, most expressing astonishment at how out of touch with reality the EDS CEO appeared to be - fixing something that's not broken (expenses), while not mending the broken fences (sales).  Undaunted, investors bid up the stock following day.  On Friday (Sep 10), EDS shares rose over 3% to close at $20.10 (see the chart).

So while Wall Street analysts and investors applauded the EDS CEO's latest move, we thought some unsolicited reactions we have received from former EDS insiders were just as newsworthy.  They came from senior EDS executives who had left the company during the Dick Brown era (i.e., they should not have any personal gripes with Michael Jordan).  None of them wanted to be quoted by name as they retain a keen interest in their business "alma mater."  So we'll just refer to them chronologically, as Executive #1 through #4.

"Good article," said Executive #1, referring the Sep 10 TheStreet.com piece on EDS.  "The basic problem is (that Dick) Brown ran off a lot of talent who understood how the business operated. Jordan has now brought in a bunch of ex-CIO's who have never run a business. None of these guys would have been recruited by an executive search firm to run (even) a piece of EDS."

This former EDS executive added, "another major factor is they still have a dysfunctional organizational model with human resources having a big say in the business, the antithesis of the old EDS where the people closest to the client were empowered.  Combine that with Jordan not being a sales oriented CEO, and not much of a 'people person,' and EDS is going to continue to be challenged."

Another former executive was a little more positive.  "This one does hit home," said Executive #2 in reference to a Dallas Morning News story on the topic of new EDS layoffs.  "I still believe EDS could be turned around. They still have some of the old key people, and certainly have a great customer base to build from.  I think they are on the right track with some of the things they are doing, but this (new layoffs) certainly will make them an even easier target for the recruiters."

"I agree!" said Executive #3 also in reference to the TheStreet.com piece on EDS titled "Slimming EDS draws mixed reviews." "We took out $5 billion (out of costs) when I worked for Brown... Finding the next billion is always much more challenging, let alone $3 billion more. They can better offshore some internal activities, but not 15-20,000 positions. I wonder how many sales pro's they have left? Seems to me it's time to finally fix the non-performing contracts, offshore 2-3,000 more back office positions, and reinvest in a world class sales team. But no one is asking... especially not the BOD who brought in Jordan."

The BOD?  The BOarD of directors.  Speaking of which, at the end of this writer's interview with TheStreet.com reporter, she asked, "so what would it take (to remove Jordan)?"  

"The board," I replied. 

The reported started laughing.

"And by the board, I don't mean the wooden kind," I added.  

She was now laughing even harder.

Then pausing to reflect on what I had said, I added, "although sometimes I wonder if there is a difference.  This Board has been like a piece of wood - inert and silent, while its ship is listing."  :-)

"(Make that) driftwood," the former Executive #3 suggested, upon learning of this exchange. :-)

The next EDS story you're about to hear may sound like a joke, but sadly it is not.

We've all heard of the old saw, "cobblers kids go barefoot."  But have you ever heard of a barefoot cobbler?  Enter Charles Feld... yes, Jordan's old pal - the "CIOs' CIO" (see Cronyism Is Alive and Well at EDS", Jan 2004).

"You are right on target," said Executive #4, also in reference to the Sep 10 TheStreet.com piece on EDS in which this writer suggested the EDS  CEO is of its biggest liabilities ("The faster the board gets rid of [Jordan], the better off EDS shareholders will be," Djurdjevic said. "He's so out of touch.").  But Jordan may not be the only EDS executive liability.

"The internal leaders still around that know the game have also lost faith in Charlie Feld," Executive #4 said.  "Here is a clue: Feld does not have a PC in his office, he is out of touch with reality... I understand he has his secretary print out his e-mail and responds to them on paper.  Then she re-enters them.  Strange, but true."

So there you have it... a ship's captain without a compass and rudder depending on a CIO without a PC and e-mail for navigation and direction.  

Makes one wonder what the Wall Street types had inhaled before bidding up the EDS stock?  Oops... we forgot.  They'd never captained a big IT ship before, either.

Happy bargain hunting!

Bob Djurdjevic

U.S. Air Bankruptcy Adds to EDS' Woes

PHOENIX, Sep 13 - U.S. Airways added to EDS' woes this weekend by filing for bankruptcy protection under Chapter 11 for the second time in two years.  The action means that two of the nation's six major carriers are now in bankruptcy, a fate that could befall others as passengers increasingly choose discount carriers. The other is United Airlines, while Delta is struggling to avert a similar fate.

Why did U.S. Air's bankruptcy filing add to EDS woes?  Because the once proud IT services supplier which boasted in 2001 about being the number of supplier to the airline industry, is one of U.S. Air's biggest unsecured creditors.  EDS is listed in the U.S. Air filing as its largest unsecured creditor after the major aircraft manufacturers (GE, Embraer, Bombardier).  U.S. Air currently owes EDS (including Sabre) about $23 million, according to bankruptcy records.

If the airline bites the dust, that amount, plus the future payments due to EDS under the outsourcing contract, may also end up in the "ashes to ashes" file.  What are the chances of that happening?  Fairly high, actually.  Only Continental Airlines, which filed for reorganization in 1986 and 1990, successfully emerged from two rounds under court protection, according to a story in today's New York Times. TWA also filed for two rounds, but was acquired by American in 2000 under the terms of its third filing. Bankruptcy filings also led to the demise of Braniff, Eastern and Pan Am. 

Closer to home, U.S. Air chairman and CEO, David Bronner, warned last month that a second filing could lead to a liquidation if new investors did not come forward with financing so that the airline could repay its government-backed loans.  Bronner, an industry novice, now joins a small group of otherwise successful business leaders tripped up by the airline industry.  The list includes the chairman of Berkshire Hathaway, Warren Buffett, one of America's richest people, who also invested in U.S. Air, and Carl Icahn, who once controlled TWA.

But the biggest losers among the U.S. Air shareholders may be the state employees of Alabama.  As a result of the second bankruptcy filing, Retirement Systems of Alabama, U.S Airways' largest investor with a 36% equity stake, stands to lose its entire investment - $240 million in equity and $500 million in debt - as the carrier's stock will probably be canceled when the carrier steps out of court protection, according to today's Wall Street Journal.  

It is a nary consolation to the EDS employees that they are buffeted by bankruptcies of the same former airline icons as are the esteemed investors Buffett and Icahn.  "Happiness seeks solitude when misery seeks company" (from "The Murmuring Stream" by Daniel).  

To escape collective misery one should seek solitude if one is to find happiness again, according to this poet.  That's hardly the advice the EDS employees are getting either from the Plano ivory tower, or from Wall Street.  "Start floating your resumes out in the streets," seems to be the message instead.

---

NOTE: In a press release dated March 15, 2001, EDS said among other things:

"EDS becomes the number one provider of global IT infrastructure services to the airline industry, adding the strength of carriers like American Airlines and US Airways to its existing list of premier airline clients. These clients include Continental, AeroMexico, Mexicana, British Airways, Virgin Atlantic and America West." [emphasis added]

Annex Editor's comment:  BIG BROTHER ON WALL STREET

After dropping initially to $19.70 following the opening bell on Sep 16, the EDS shares continued to climb the rest of the morning.  As of 1PM (EDT), they were up 0.66% to $20.  Which goes to show us just how (ir)relevant the company's fundamentals are these days at the Wall Street Casino.  EDS confirms our report from three days ago , which said the U.S. Air bankruptcy was likely to add to EDS' already formidable woes, and the market applauds the news!? Go figure... Big Brother would be happy.  Remember his slogans -  "war is peace;" "freedom is slavery;" "ignorance is strength?"

The "Mañana Recovery"

PHOENIX, Sep 29 - It looks like EDS is off to another rocky start - in the Rocky Mountains.  This time, it is rocking the boat of the poor and the indigent of Colorado who are getting the brunt of the erstwhile IT services industry leader's incompetence.  As you can see from today's Rocky Mountain News story, it took an intervention by the state's governor himself to get someone at EDS to throw in hardware at the problem - again at EDS shareholders' cost, of course.

Meanwhile, we see EDS executives running around wooing some periodicals (e.g., Forbes, Business Week) in an effort to put a positive spin on a string of bad news.  In the latest piece, published today by Business Week, Michael Jordan and his lieutenants are asking for more time ("EDS to Critics: Wait Till Next Year"). That's like "Waiting for Godot" (1953, Samuel Beckett). 

Why?  Why should they be given more time when their ship keeps listing more and more every quarter?  Normally, new CEOs are given 100 days as a "honeymoon" period after they take the rudder.  Jordan has been at the helm for 18 months now.  And things are going from bad to worse in this "Mañana Recovery."  The way we see things at EDS, with every day that the current crew is at its helm, the company is another day further away from recovery.

For additional Annex Research reports, check out... 

2004: EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004) HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

2003 EDS: “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 EDS: 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 Newsflash 2004-18
September 12, 2004

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

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