EDS Introduces Internet Venture Capital Fund

The fund is expected to grow to $1.5 billion when fully funded over the next five years.
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Electronic Data Systems

(EDS)

is starting an Internet venture capital fund, which is expected to grow to $1.5 billion when fully funded over the next five years.

The fund will invest in some of the business-to-business company's Internet-based clients, EDS said Friday. Half of the $1.5 billion will come from the Plano, Texas-based company, while the other half will come from private investors.

Analysts applauded the move, saying it is a natural one for the consulting company. "It is a great idea whose timing is right," said Brian Miamone, e-business services analyst at

ING Barings

, noting that smaller e-business competitors, such as

Scient

(SCNT)

and

Viant

(VIAN)

, have started similar funds. And

Andersen Consulting

just closed a $1 billion Internet investment fund of its own.

The trend is not limited to business-to-business companies, however. On Wednesday,

Time Warner

(TWX)

said it set up a $500 million fund to invest in new digital media.

What such funds enable EDS and others to do is gain entry to startup Internet companies, Maimone said. "Many companies are investing in dot-coms to help gain experience in building first-generation Internet infrastructures." For a business services company, that kind of experience is invaluable, he said.

By creating a fund to invest in some of the company's clients, EDS is clearly hoping to solidify its relationships with those clients. And the financial rewards could be high as well.

"It is a good opportunistic move for them," said Mark Jordan, analyst with

A.G. Edwards

in St. Louis. "Companies like EDS bring value to these early stage companies, and these funds create a vehicle to capture some of that value where there wasn't a vehicle before."

Maimone of ING Barings added, "And maybe you invest in a company like

eBay

(EBAY) - Get Report

that just blossoms."

The presence of the fund also enables EDS to offer employees the chance to gain additional Internet experience, as well as the opportunity for those employees to reap the financial awards of the Internet economy, Maimone said. "To the extent that you can provide cutting-edge experience for employees, this is another quiver in the bow" for EDS, he said.

ING Barings has not done any investment banking for EDS in the last five years, and he rates the stock a buy. A.G. Edwards has not done any investment banking for EDS, and Jordan rates the stock a maintain.

EDS said Friday that the fund has made its first two investments, including $10 million in closely held

Tradex Technologies

. Tradex is being

taken over by

Ariba

(ARBA)

in a $2 billion stock swap deal. EDS is a Tradex client.

The second investment is in

EDS CoNext

, a "netmarket provider" that is meant to help companies make large purchases. "EDS sees the need for innovative services and opportunities to be developed to help further its own offerings and to betters serve its clients," Dick Brown, EDS' chairman and chief executive, said in a statement. "The fund will foster development of those services."

The fund is dubbed

EDS-A.T. Kearney Ventures

.

A.T. Kearney

is EDS' management consulting subsidiary.