is struggling to reboot.
The glitch-prone computer services giant could soon take dramatic steps -- including slashing its dividend and issuing more shares -- in an effort to dodge a junk credit rating that could further erode its business. The company, which previously downplayed a possible downgrade, finally recognized the threat in an ominous quarterly report filed after the market closed on Monday.
"These credit rating agencies could take further adverse actions with respect to our ratings, which could have an adverse effect on the market price of our securities," the filing states. "In addition, a negative change in our ratings could materially adversely impact our ability to compete for new business as well as our ability to access capital and our cost of capital."
The warning comes as EDS is already fighting -- and failing -- to gain market share in the highly competitive computer services industry. In its glory days, EDS relied on high-profile "megadeals" to grow its business. But the huge contracts required significant cash investments that, in some cases, have yet to pay off. Indeed, the company's largest megadeal -- a contract to create the Navy-Marine Corps Intranet -- has turned into a disaster.
The company's long-struggling stock fell 6.9% to $16.30 -- a 52-week low -- on the latest disclosures.
By now, the NMCI deal has triggered big charges, earnings misses and reductions in cash flow guidance. It has also sparked a formal probe by the
Securities and Exchange Commission
. Moreover, it has now led management to acknowledge breakdowns in its internal control system for a second time.
Last year, EDS detected and later remedied deficiencies in its ability to estimate revenues and costs associated with the NMCI contract. On Monday, the company announced that it had recently detected additional weaknesses -- some dating back two years -- with the NMCI project. It described both past and recent deficiencies as "reportable conditions" that could threaten the validity of the company's financial statements.
By now, many analysts have lost patience with the former industry darling that has, so far, failed to rebound under the leadership of turnaround CEO Michael Jordan. They have, in fact, come to expect big disappointments from the company instead.
On Monday, for example, Prudential Equity analyst Bryan Keane noted that EDS is -- once again -- running behind schedule on its big Navy contract. Keane, who has no price target on EDS' shares due to uncertainty surrounding the SEC investigation, has recommended underweighting the stock for months.
Bob Djurdjevic, an industry analyst at Annex Research in Phoenix, doubts that EDS will ever recover in the end.
"They have to change the game plan," he explained. "I've been saying for over a year that what's broken at EDS is the sales strategy. But I don't see any hotshot sales leaders -- even now."
Grass Is Greener
Djurdjevic says that EDS's peers, most notably
, have grown their business by simply offering valuable outsourcing services to their clients. In contrast, he said, EDS has acted more like a bank that actually buys its customers' assets in contracts that -- like the Navy megadeal -- often fail to make any money. And he has seen no real improvements under the company's new management team.
Ultimately, Djurdjevic expects a stronger company to scoop up EDS on the cheap.
The buyout might be "like swallowing a poison pill," he said. "But if it doesn't kill you, it might cure you. ... Somebody could buy the company, dump all the poison out and keep the good stuff -- because there is some good stuff at EDS."
Still, Djurdjevic doesn't expect EDS to become an attractive target until its stock falls to $12 or $13 a share.
Meanwhile, Gimme Credit analyst Carol Levenson is warning about potential downside in the company's bonds as well. Levenson did concede that EDS could soon take steps that would "bolster the company's financial strength at a time when its business prospects and cash flow generation seem fraught with uncertainty." Specifically, EDS may cut its annual dividend by two-thirds to 20 cents a share and sell $1 billion worth of new equity or equity-linked securities. Levenson applauded EDS' sudden focus on its balance sheet -- but also seemed to question the company's past dismissal of the issues now at center stage.
Even in its latest earnings release and conference call, she noted, EDS downplayed the gravity of the current situation.
"As we've noted before, some of the more ... reticent ... companies we follow tend to accentuate the positive in their earnings releases, only to lay out the unvarnished and often sobering facts in their subsequent filings. EDS," Levenson declared, "is a master of this practice."