Brits Embrace EDS
Electronic Data Systems
(EDS)
is in the process of rebooting.
The struggling company announced on Wednesday that it has snared a $4 billion contract that ranks as its biggest deal since business started falling apart in 2002. An EDS-led group has been chosen as the preferred bidder for a massive, 10-year project designed to consolidate information networks for the U.K. military. EDS is expected to collect most of the pie.
EDS scored the win after losing a major deal in the U.K. last year and, some believe, took a step toward repairing its credibility in the process. But skeptics fear the company has instead saddled itself with another military contract like the troublesome Navy deal that has damaged its performance for years.
Bob Djurdjevic, an industry analyst at Annex Research, notes that the Navy project -- widely celebrated by investors at first -- has led to huge losses for the company and may fail to generate a dime under its initial terms. Thus, he offered words of caution after rumors of the new military contract sent EDS shares higher earlier this week.
"Is that what the EDS shareholders can expect from the win?" asked Djurdjevic. "If so, sensible traders should trade the EDS shares down on the day its victory is actually announced."
Instead, the stock climbed another 1.6% on Wednesday to $21.39, and some analysts offered cautious words of hope.
A.G. Edwards analyst Timothy Will called the win a "huge vote of confidence" for EDS, especially after the company's loss of the Inland Revenue contract in the U.K. and its ongoing problems with the Navy deal at home. He also said the new megadeal improves visibility on revenue.
That said, however, Will clearly has concerns. He said that such megadeals -- known to be capital-intensive -- have often proven to be "more trouble than they are worth." He went on to say that the rise in revenue could also bring a drop in cash flow.
Moreover, he expressed worry about operational challenges along the way.
"In light of EDS's highly publicized missteps both in the U.S. and in the U.K., it is expected that EDS's performance and execution will be highly scrutinized and very little latitude will be afforded in the event of any missteps," wrote Will, who has a hold rating on EDS shares. "While we do feel that EDS's prior experience with large contracts may serve it well, we prefer to take a very cautious stance at this time."
Medicaid Programs
EDS has won a smaller contract as well.
The company said on Monday that it has inked a seven-year deal, valued at $189 million, to launch a new information system for the Medicaid program in Wisconsin. EDS has been conducting business with the state's Department of Health and Family Services for 27 years.
"We are honored by the state's trust in extending our existing relationship," said Jim Duffey, a company vice president who presides over sales to the U.S. government. "Our relationship with Wisconsin has been nationally recognized as a role model for outsourcing arrangements."
EDS went on to tout its status as "the nation's largest provider of Medicaid and Medicare process management services." It said that it processes more Medicaid claims than any other company in the nation. In addition, it boasted that it managed to renew four out of five Medicaid contracts just last year.
However, the company is still fighting to keep its Medicaid contract in North Carolina. The state originally chose
Affiliated Computer Services
(ACS)
instead. But after protests from EDS, a North Carolina judge found problems with the ACS bid and recommended in January that the contract award be nullified. The situation remains unresolved.
Since then, however, the local
News & Observer
has reported on an embarrassing glitch in the state's EDS-run system. The newspaper said that EDS last month accidentally denied 900 claims -- totaling $65 million -- that were submitted by nursing homes and facilities for the mentally retarded. EDS told the newspaper that the problem has been fixed.
Still, such publicity can't help the company. Meanwhile, ACS continues to insist that it deserves to run the show.
"EDS held the Medicaid Management Information System contract in North Carolina for 27 years," Harvey Braswell, an ACS division president, acknowledged in a letter to the
News & Observer
on Tuesday. But "its bid price for the new system was $80 million more than that of ACS. ... In choosing ACS, the state received the best value."
History Lesson
Some might feel relieved to hear such claims.
When it comes to mega-deals, at least, EDS has sometimes found itself bidding too little in order to score a win. Analysts mulling over the new U.K. military contract would like to think that the company has not made the same mistake again.
"This should be a good new contract for EDS, as we believe the company likely took the hard lessons learned from the Navy debacle to improve its risk profile here," wrote Goldman Sachs analyst Gregory Gould, who has an in-line rating on EDS shares. "Nevertheless, there may be some skepticism on the Street about the contract's ultimate profitability and cash flow because of the problems with the Navy contract."
Given past setbacks, Merrill Lynch analyst Gregory Smith found himself "somewhat surprised" that EDS managed to land the U.K. military deal at all. Despite the victory, however, he still recommends selling the company's stock because of all the challenges that lie ahead.
For his part, Djurdjevic believes the company needs nothing less than a new owner. And he points to
Fujitsu
-- a partner on the new U.K. project -- as a possible buyer. He calls Fujitsu the largest computer services company in Japan and the second-largest in the world.
"But nobody knows that," he said. "They don't have a brand name. EDS has a brand name -- although, mind you, it's tarnished."
Djurdjevic suspects that Fujitsu might become interested in buying EDS if the company's share price drops down into the $10 to $12 range. In the meantime, he says, the Japanese company can get to know EDS "up close and personally" during its work on the new U.K. deal.
Djurdjevic believes that Fujitsu -- now working on the Inland Revenue project EDS lost -- may have actually helped EDS land its latest megadeal in the U.K. due to its "good contacts with the British government." Even so, he still questions whether such deals are really worth the price.
"As we've often said of such megadeals," Djurdjevic reminded, "they are like a game of chicken. The last company to say 'no' to the deal gets stuck with it."