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A SPECIAL ANNEX NEWSFLASH

Updated 1/17/04, 11:15 a.m. MST (adds "new EDS logo")

EDS Acquires The Feld Group for $89 Million

Cronyism Is Alive and Well at EDS

EDS Rewards Longtime Friend of Its CEO with High Post and Huge Premium for His Small Company

PHOENIX, Jan 12 - When tens of billions of dollars started fleeing Southeast Asia in the fall of 1997, spawning a financial crisis (see "The Great Asian Bailout", Annex Bulletin 97-43, Nov 1997), western investors and politicians blamed the local (Asian) cronyism for causing a lack of confidence in that global market.  No such concerns seemed evident today among the Electronic Data Systems (EDS) investors and shareholders.  The stock edged up slightly (up 0.42% to $23.81) on the news of cronyism being practiced at the Plano, Texas-based company.

Of course, that's not exactly how the EDS put it in its news release.  One had to read between the lines and do some independent research before realizing that the second largest IT services company in the world may have suffered a "reverse takeover" - by a small company it had just acquired.  The Feld Group, a $27 million-consultancy with 60 employees, headed by Charles Feld, a longtime friend of EDS's CEO, Michael Jordan, was purchased for about $89 million by a $21.5 billion company with 137,000 employees.

Why a "reverse takeover?"  Because Feld Group employees, led by Charles Feld, are taking over many senior and other management positions previously held by seasoned EDS veterans.  They bring a "world-class talent" to EDS that "will greatly increase our offerings and expertise in the field," Jordan boasted in a release.

As to the Feld Group expertise, it lies in a field in which EDS is already supposed to be a world leader - the use and application of technology in business processes.  So why is Jordan fixing something that's not broken? (i.e., EDS's internal "plumbing" - instead of its slumping sales? - see "Pain without Gain", Oct 2003).

Beats us.  Would you call a plumber if you had a leaky roof?  Most people would not.  Well, that's basically what EDS has done.  But in doing so, Jordan and Feld may well be telling us something that we were not very aware of - that EDS may have BOTH plumbing AND roofing problems.  Ouch! 

Huge Premium for Small Company

With the Feld Group executives' takeover of key EDS functions, one can expect to see gradual eradication of the "EDS culture," and the establishment of a new "Feld culture," some EDS insiders fear.  

Such fears are not new, of course.  Last fall, for example, several news media stories warned of the impending takeover and its high rumored costs (see EDS Directors Delay Bid for Feld, Wall Street Journal, Nov 7, and Cost called obstacle to EDS proposal, Dallas Morning News, Nov 8).

What is new is that these fears and rumors are now facts.  The price EDS has paid for Jordan pal's company is grossly inflated compared to any other recent takeover deals in the public domain.

As you can see from the above chart, EDS's own price/revenue ratio is 0.54.  When IBM took over PricewaterhouseCoopers Consulting (PwCC) in the summer of 2002, the $3.5 billion price tag implied a 0.71 price/revenue ratio (see "Half or Double Trouble?" Aug 2, 2002).  Even the world's most admired publicly traded consulting firm - Accenture Ltd. - whose shares are trading close to the 52-week high ($26.95), and whose price/earnings ratio is 24.61 versus 11.44 for EDS, carries a 1.76 price/revenue ratio.  Compare that to today's EDS deal priced at 3.3 times the Feld revenue!  

Furthermore, if the revenue that The Feld Group earned from EDS (less than 25%) in 2003 were excluded from the total, the price/revenue ratio would shoot up to over 4.2 times the revenue (see the chart).

When the rumors about the takeover first hit the street last fall, some EDS directors reportedly had problems with the high proposed premium being paid to a small company whose head was a close friend of the EDS CEO.  The fact that Jordan has been able to push the deal through despite the initial dissent tells us at least two things: 

  • Cronyism is alive and well even among some of the the nation's largest companies (EDS is #80 on the Fortune 500 list), not just in Southeast Asia, or among some "ma and pa" operations; 

  • EDS shareholders evidently have no more reason to trust their current Board with their money than did the shareholders of the many now defunct Asian corporate carcasses six years ago.

But there is more...

All in the Family!

EDS said today that the Feld acquisition encompassed $41 million in cash and $48 million in restricted stock, warrants and options.  Of the $41 million cash payment, $37 million was paid to Mobius Venture Capital, a 40% stakeholder in The Feld Group.  Mobius also received warrants to buy EDS shares valued at about $7 million.  The Feld Group employees received about $4 million in cash.

An EDS spokeswoman today said she did not know the percentage of the Feld Group shares that Charles Feld held himself.  But we have learned from other sources that it is probably close to 85%.  So when EDS says "Feld Group employees," read Feld, the CEO, for the most part.

When asked if there was a connection between Feld and Mobius, the EDS spokeswoman said at first said there was none.  But when faced when some additional facts that we had uncovered independently, she said in a subsequent conversation that she'd heard, "Charlie's son was also involved." 

Well, Kenny Feld, Charles Feld's son, is indeed "involved," but not with Mobius.  The Feld Group web site lists him as responsible for sales and service of the software practice.  But there are also several other Feld's a field in this "all in the family" deal...

Charles Feld's nephew, for example, Brad Feld, is the managing director of Mobius, the venture capital company that just got paid off by EDS to the tune of $37 million in cash and $7 million in warrants.  His brother, Dan Feld, is Mobius' director of operations.  Both are sons of Dr. Stan Feld, an MD (see the chart).

So much for Charles Feld supposedly not having any ties to Mobius!

Is it possible that the EDS directors, like the EDS spokeswoman, did not know about these Feld family connections when they approved the deal?  It is possible.  Is it likely?  Not very.

But even if they didn't know, that's no excuse.  They have a fiduciary responsibility to the EDS shareholders whose interests directors are paid to protect.  That's their sole raison d'etre.  So either way, they have failed to exercise due diligence that the EDS shareholders rightfully expect of them.  

How does that bode for the EDS future?  You be the judge.  You've seen from our "Five Most and Least Likely Forecasts for 2004" (Jan 2004) that we don't think Michael Jordan will last the year as the EDS CEO.  Which means that the budding Feld empire may also unravel.

But if we are wrong, and if they all stay and turn EDS around into a growing a profitable company, who knows, maybe a name change will be in the offing.  "Feld, Feld & Feld?"  It rhymes with "Geld, Geld und Geld" ("Money, Money & Money" - in German).  

As it turns out, someone else at EDS had a similar idea... check out the "new EDS logo" that we've just received from one of EDS employees J.  

[For those who may not be familiar with the actual EDS logo, here it is... ]

By the way, notice that Mobius wasn't all that hot on the EDS future, either?  This Feld-held venture capital firm preferred cash to EDS shares.  Aren't venture capitalists supposed to profit from stock appreciation?  

So much for putting the Feld money where the EDS mouth is.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports on EDS, check out... 

2004: "Cronyism Is Alive and Well at EDS" (Jan 2004);  "Five Most and Least Likely Forecasts for 2004" (Jan 2004)

2003: “Biggest Feather in Cap’s Cap,” (Dec 2003); "Pain without Gain" (Oct 2003), "EDS CEO Replaced" (Mar 2003);  Rebuilding Trust and Confidence (Feb 2003)

2002: Wall Street Legal Vultures Descend Upon EDS (Sep 27, 2002),  EDS Issues Earnings Warning (Sep 18, 2002),  Wall Street-Main Street Chasm Widens (July 3, 2002),  Analysis of EDS 4Q01 Results (Feb 8, 2002)

A selection from prior years: Annex Research Analysis of EDS 4Q00 Results (Feb 7, 2001),  EDS Takes Over US Navy (Oct. 10, 2000),  EDS Second Quarter Results (July 28, 2000),  Annex Bulletin - 2000-02 (EDS' e-Price Clubs).

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

Volume XX, Annex Newsflash 2004-02
January 12, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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