Electronic Data Systems
were hit hard Monday as investors continued to worry about its relationship with
while hearing word that the company has broken off talks with
Procter & Gamble
regarding a potential outsourcing contract.
In a statement, EDS, a computer services and consulting company, said it has discontinued talks with P&G about managing some of the consumer products maker's information technology systems.
"The decision to terminate discussions was made after careful consideration of the overall transaction requirements and more specifically, the acquisition price sought by P&G for intangibles associated with the related business assets," EDS said in a statement.
The announcement left some observers wondering why EDS would turn down potential new business when it could be holding the short end of the stick thanks to its agreements with WorldCom.
EDS signed an 11-year, $6.4 billion information technology services contract with WorldCom in 1999. With WorldCom, which last week said it uncovered $3.8 billion in improperly booked costs, trying to manage a financial crisis, the concern is that the telco won't be able to uphold its end of the contract with EDS.
EDS said "in certain downside scenarios these
WorldCom developments could be material to
the company's results of operations in 2002, in most events they are not, and in any event they are not material to EDS' financial position." The company still expects WorldCom to contribute $160 million to $175 million to revenue and 3 cents to 4 cents a share to earnings in each of the last two quarters of 2002.
In addition to the IT services contracts, the companies signed a $6 billion deal in 1999 requiring EDS to buy telecommunication network services from WorldCom over 11 years.
Analysts were divided on how WorldCom would affect EDS. Lehman Brothers upgraded EDS to a strong buy from a buy saying, "An outright contract termination is unlikely, and we do not believe that the contract has any material accounting irregularities." Meanwhile, both UBS Warburg and Credit Suisse First Boston cut their price targets on EDS but maintained their ratings. Separately, Standard & Poor's said the WorldCom relationship wouldn't have any effect on EDS' ratings.
EDS closed down 18% to $30.45, its lowest level since late 1998.