When HPS beats out EDS and IBM, on the other hand, in a highly contested global “megadeal” (such as at Procter & Gamble or at Nokia, for example), the CEOs of State Street, Barclays, Fidelity or Capital Research must be again wringing their hands in glee. 

That’s because these four companies are the four largest institutional shareholders of the Top 8[1] global IT services firms.  Each has a vested interest in each of the three IT competitors mentioned to the tune of billions, or hundreds of millions of dollars. 

So even when some IT vendors lose, some of their owners win.  That’s called hedging the bets. 

That’s one of the conclusions we reached after an exhaustive study of the Top 25 institutional shareholders in the Top 8 IT services providers. 

In the aggregate, some of Wall Street’s biggest movers and shakers accounted for about 26% of the Top 8 IT companies’ market cap ($75 billion out of $257 billion – as of Sep 30, 2003, the latest date for which such data is available).  And it’s an incestuous world out there on Wall Street…

Incestuous World

Take Capital Research, for example, the fourth largest institutional owner of the Top 8 IT services companies, with about $5.3 billion of total capital invested.  About 45% of that total, or $2.4 billion as of Sep 30, 2003, was its IBM bet. 

At the same time, however, Capital Research also owned $1.7 billion (a 33% bet) of HP, and $1.1 billion (a 20% bet) of EDS.  It even owned $153 million (a 3% bet) of Computer Sciences Corp. (CSC), just for good measure, we suppose.  But it did not own any stock in Accenture, Affiliated Computer Services (ACS), BearingPoint (BE) or Perot Systems (PER).

(By the way, Capital Research is by far the largest EDS owner with 11% of total shares… see the chart and Top 25 Table for more details).

Similar stories about hedging the bets emanate over and over again from the Top 25 institutions portfolios.  It’s just that the ownership and proportions vary.

State Street Global Advisors, for example, the largest institutional shareholder in IT firms with over $14 billion at stake, is heavily concentrated in IBM, of which it is the largest shareholder (it owned $11.4 billion, or 7.5% of total IBM shares outstanding).  Big Blue accounts for 81% of State Street’s Top 8 portfolio.  But State Street also owned a piece of every Top 8 IT company except for Accenture.

Ditto re. Fidelity Management, the third largest institutional investor, whose stake in the Top 8 amounted to $5.4 billion as of Sep 30, 2003.  It also shunned Accenture while investing in the other seven competitors.

In fact, Accenture has the lowest percentage of institutional shareholdings of all Top 8 IT services firms (31%, versus the average of 67%).

EDS, ACS – Most Vulnerable, Accenture Least

Is that a blessing or a curse?  We are inclined to think it is the former.  Lower institutional ownership means that the Accenture shares are less susceptible to the Wall Street big shots’ whims and capricious moves that are often driven by gossip rather than company fundamentals.

High institutional shareholdings, on the other hand, can mean greater stock price volatility.  EDS, which is 92% owned by institutions, found that out in September 2002, for example, when its shares plummeted following disappointing news (see “EDS Issues Warning,” and “Wall Street Legal Vultures Descend Upon EDS”). 

And even this year, EDS’ shares were the only ones among the Top 8 to decline (down 2% since Sep 30, 2003).  The market cap of the Top 8 competitors’ increased by about 11% on average during the same time frame (Accenture is up 5%, IBM 9%, HP 17%, for example, while BearingPoint and Perot Systems have surged 32% and 40% respectively).

ACS is just as vulnerable as EDS to institutional investors’ whims.  The latter own about 94% of that company’s outstanding shares.  CSC’s and BearingPoint’s institutional shareholdings are also relatively high – 77% and 73% respectively (the average for the Top 8 is 67%).

IBM and HP are in the middle of the Top 8 IT pack, with 56% and 67% of their shares respectively owned by institutions.  Accenture and Perot Systems are bringing up the rear, with 31% and 42% respective institutional ownership.

In terms of the institutions’ shares of the Top 8 market cap, EDS, ACS and BearingPoint are at the point with 65%, 52% and 50% shares respectively.  CSC isn’t far behind, either, with a 48% market cap share attributable to institutions.

Insiders Putting Money Where Mouth Is?

Perot Systems and BearingPoint also have the highest insider shareholding percentages (35% and 20% respectively).  Accenture, ACS and HP are this time in the middle of the pack, with 8%, 8% and 7% respective insider share ownership, while CSC, IBM and EDS bring up the rear (almost zero and 1% respectively).

To the extent that management and shareholders’ interests are best served when they are closely aligned, it seems a good idea for insiders to own more than just a token share of the company.  CSC, IBM and EDS stand out among the Top 8 in the opposite direction.  Their executives seem to be incented the least to identify with, and act in their passive shareholders’ interests. 

No wonder some of them are acting as if they are not putting their money where their mouth is (IBM - stock options and buybacks; EDS - nepotism, for example).  And that’s another reason for institutional investors’ hedging of their bets.

Happy bargain hunting!

Bob Djurdjevic

[1]  The “Top 8” IT services companies would, of course, include Cap Gemini.  But this company’s shares are traded on the Paris Bourse, and the data about institutional shareholdings is not readily available.

For additional Annex Research reports, check out... 

2004 IT: Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: " Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

2003 Global: "A Passage to India" (July 22),  Exodus from Equities (May 27), Money CAN Buy Longer Life (May 6), Global Investments Plummet (Jan 23)

A selection from prior years (Global): Greed Bites Back (Nov 29, 2002),  Salomon/Gutfreund: Wall Street Casino (June 21, 2002),  "From a Nation of Producers, to a Nation of Gamblers " (June 23, 1999), "When Will Wall Street's Bubble Burst?" (1998), "Wall St.'s Conquest of America" (1998),   THE GREAT AMERICAN HOOVER (1997)

Or just click on and use "financial engineering" or similar  keywords.

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