Slimming EDS Draws Mixed Reviews
Melissa Davis
09/10/04 - 01:30 PM EDT
Electronic Data Systems (EDS Quote) continues to dismantle itself.
The company now plans to take apart its workforce -- slashing up to 20,000 more jobs -- and then put itself back together as a more efficient operation. CEO Michael Jordan announced the future cuts during a presentation to investors in New York on Thursday. EDS spokesman Kevin Lightfoot told
TheStreet.com on Friday that the layoffs are simply part of the company's established plan to shave its cost structure by 20%, or $3 billion, over the next several years.
Currently, EDS employs 122,000 people around the world. But some 5,000 EDS workers have already lost their jobs during Jordan's attempt to rebuild the company.
At least one EDS critic fears that Jordan -- hired in March 2003 as a "turnaround CEO" -- is destroying the company instead.
"Michael Jordan continues to be fixing something that's not broken," insisted Bob Djurdjevic, an industry analyst at Annex Research. "Cost-cutting is what he knows how to do ... but that is certainly the last thing this company needs right now."
EDS has blamed much of its troubles on "problem contracts," particularly a multibillion-dollar deal with the U.S. Navy, signed before Jordan arrived at the company. But EDS critics also worry about the contracts the company is
not signing now.
UBS analyst Adam Frisch -- an early EDS bear -- noted last month that less than 20% of the company's second-quarter bookings came from new customers. Moreover, he suspects that metric could weaken even more in the second half of this year due to EDS' new junk credit rating. He says that a slew of competitors, including industry leader
IBM (IBM Quote), can deliver the same services as EDS without the risk posed by junk credit.
Djurdjevic is worried about the company's ability to attract new business as well. He says that EDS relied heavily on existing customers for "add-on" business to increase bookings in the latest quarter. Yet he also spotted clear signs that EDS may be failing to please even that client base. He says the company's outright renewal rate was just 14% -- a steep drop from the 45% reported in the first quarter -- during the most recent period.
And like Frisch, Djurdjevic suspects that second-half numbers could look even worse. He says the company is banking heavily on new customer bookings -- a recent weak spot -- for the remainder of the year.
He's also convinced that news of the pending layoffs will simply add to the company's challenges.
"In the services business, your people are your assets," Djurdjevic explained. "So [Jordan] is reducing his chances for future growth. ... He doesn't seem to understand what business he is in."
For its part, EDS offered some defense of Jordan's performance.
"The transformation is moving forward," Lightfoot told
TheStreet.com on Friday. "We have always said this would be a multiyear transformation. We have a plan -- and we are very focused on sticking to that plan."
Lightfoot went on to describe cost-cutting as a "major plank" in Jordan's strategy. EDS tapped Jordan as its CEO based in part on his past leadership of manufacturing giant Westinghouse Electric, which under his watch morphed into a media company named for its big broadcast asset, CBS, that he subsequently sold to
Viacom (VIA Quote). However, Jordan's turnaround plan at EDS has yet to pan out. The company continues to lose huge sums on old contracts while struggling to attract new customers.
Frisch, for one, is clearly worried. He says the company seems to lack "a clear path to achieving material, sustainable margin expansion and cash flow growth."
He therefore recommends selling the company's stock. But investors aren't listening. Instead, they drove EDS shares up 1.4% to $19.79 -- a four-month high -- after Wednesday's reports of pending layoffs.
The jump came just one day after Bernstein analyst Rod Bourgeois reiterated his outperform rating on the stock. Unlike most, Bourgeois expects EDS to start delivering more good news than bad. He says that key negatives, including the company's junk credit rating and "poor business mix," are already priced into the stock. But he suspects that a series of positive catalysts -- including the potential for "meaningfully improved earnings" from the company's core business -- are being overlooked by the market.
He therefore expects the stock to keep moving higher.
"While our long-term concerns are meaningful, we do not expect these issues will show much impact in the next couple of quarters," he wrote. Moreover, "we anticipate further encouraging commentary from management in upcoming interactions with investors, which could extend the recent rally in the stock."
Nevertheless, Djurdjevic doubts that a real turnaround is under way.
"Maybe some gullible Wall Street analysts or investors are lapping up [the company's] rosy forecasts and turning them into their own 'feel-good' fables," Djurdjevic noted this summer. "But count us out."
Djurdjevic is convinced that EDS shares are seriously overvalued. Therefore, he doubts that a buyer would be interested in taking over the company right now. And he has worries that current management will just keep hurting the company more.
"The faster the board gets rid of [Jordan], the better off EDS shareholders will be," Djurdjevic said. "He's so out of touch."
