, which prides itself on landing huge outsourcing deals, just lost a big one.
Shares in the Plano, Texas, computer-services giant plunged Thursday after the company failed to secure a $7 billion contract with
Procter & Gamble
less than two weeks after touting the power of its "very impressive mega-deal engine."
P&G, which nearly inked the deal before EDS scared it off with an earnings warning last month, now plans to break up the contract and dole it out in pieces. EDS' best hope now is for a mere piece of that multibillion-dollar pie.
"This is a vote of no confidence in EDS," said one short-seller. "It's a direct indication of the concerns people have about doing business with them."
The latest blow comes less than two weeks after EDS voiced optimism about its negotiations for the contract. The company, still reeling from credibility problems after a massive earnings miss last month, saw its stock slide 13%, to $14.68 on the news.
UBS Warburg Adam Frisch said he's concerned about, if not surprised by, the fate of the P&G deal.
"EDS had indicated that this was something they had a legitimate chance of winning," said Frisch, a bearish analyst with no stake in the stock. "With P&G pulling back, that raises some questions that haven't been answered."
Short-sellers speculated that EDS' balance sheet couldn't withstand the hefty capital requirements for the giant outsourcing deal. But they also questioned why clients would want EDS -- a company with "incredibly lax internal controls" -- to oversee internal controls at their own businesses.
"That's not a very good advertisement," one critic said.
EDS had hoped to see new contract signings, which fell nearly 60% last quarter, start picking up. Indeed, the company was counting on contracts like P&G to fuel a quick rebound and allow it to meet full-year earnings guidance of $2.05 to $2.10 a share.
But some, including Frisch, felt little disappointment that the P&G deal had fallen through.
"I've never been a big fan of mega-deals," Frisch said. "They make great headlines, but they're not the most profitable deals out there."
Frisch said EDS would fare better with smaller deals valued at under $10 million apiece. Christopher Penny of Friedman Billings Ramsey agreed.
"EDS doesn't have the money to invest in a large outsourcing deal," said Penny, who has no position in the stock. "And big companies aren't willing to give up their assets for nothing."
Penny, who has an underperform rating and a $14 price target on the stock, thinks the road to recovery lies elsewhere. "I'd rather see EDS shore up their core operations, fix what's internal right now and get back on their feet," he said.