Policy Management Systems

dropped 35% Monday after

EDS

, a business software and consulting company, pulled out of merger talks just two weeks after offering a sweet bid to the financial consulting company.

Shares of

Policy Management Systems

(PMS)

fell 5 9/16, to 10 3/8, in heavy trading Monday afternoon. (Policy Management Systems closed down 5 3/8, or 34%, at 10 9/16.)

EDS

(EDS)

had offered $18 to $20 for all the shares of Policy Management Systems, about a 36% premium to a takeover bid from

Welsh, Carson, Anderson & Stowe

, a private investment firm interested in the Blythewood, S.C.-based company.

Welsh, Carson had offered to buy Policy Management, now known as

Mynd

, for $14 a share.

In a letter to Policy Management Systems in late April, EDS, based in Plano, Texas, said that it might be able to offer more money if it found more reason to after reviewing Policy Management's non-public financial data.

Policy Management investors sold shares Monday, possibly speculating that EDS dropped its offer after reviewing that data.

"We thought they would lower their price, but they backed out completely," said David Easthope, a senior research associate at

Raymond James & Associates

, who rates EDS a strong buy and has done no underwriting for the company. "We thought they could potentially look at, and not like, the lawsuit by

Computer Sciences

, and other class-action suits against them." Raymond James maintains a market perform rating on Policy Management Systems.

Computer Sciences' suit contends that Policy Management Systems unlawfully acquired technology secrets from it when an employee left Computer Sciences to work for Policy Management. The class-actions suits by some shareholders contend that the company issued false statements concerning its financial data.

Easthope also said that the all-cash acquisition would put pressure on EDS' credit ratings. "

Standard & Poor's

put them on Credit Watch. EDS might be thinking they'd have trouble making the numbers work if they go through with this."

Investors who sent EDS stock tumbling 18% in the two weeks following EDS's acquisition intentions, bid the stock up just 2 1/16, or 3%, to 63 5/16 Monday afternoon. "I'm a little surprised EDS didn't jump 3 to 5 points," Easthope said. (EDS closed up 1 7/8, or 3%, at 63 1/8.)