Annex Newsflash 2005-10                              March 30, 2005

INDUSTRY TRENDS

Updated 4/04/05, 0:05 AM PDT (adds "EDS Among Least Admired")

Two CEOs Make the News Today...  

EDS Executive Suite: How Sweet It Is...

EDS CEO Gets $1.1 Million Bonus for Generating "Red Ink"

Hewlett Packard Gets New CEO: Hurd's the New Word 

Hurd: HP's New $7.5 Billion-Man!

NEW YORK, Mar 30 – Even before Carly Fiorina was ousted last month as the Hewlett Packard CEO, some media reports noted the new activism and vigilance among America's corporate boards.  They opined that it was a result of several unfavorable court rulings in WorldCom and Enron cases.  The Wall Street Journal reported in a Jan 13 story, for example, that 10 former directors of WorldCom Inc. (now called MCI Inc.), and another 10 from Enron Corp., had agreed to fork over a total of $31 million from their own wallets to settle lawsuits.

"The latest settlements mirror a wider trend: Investors and regulators now hold directors to higher standards because they believe less-than-diligent boards helped cause the recent wave of corporate scandals," the Journal said.

Well, EDS's directors evidently don't care much about such matters.  For, they have just lowered their standards for rewarding success.  They rewarded the EDS CEO, Michael Jordan, with a $1.1 million bonus for another year of losses.  His bonus more than doubled from $540,000 that he received for presiding over a larger loss in 2003.  Enron's Ken Lay would be probably chuckling...

In 2004, EDS lost $295 million from continuing operations after losing $357 million the year before (see the chart - an excerpt from EDS's 10K filing with the SEC, which we are using to avoid any doubt about the red-circled facts officially disclosed by the company):

Yet the Wall Street Journal reported today at its web site, quoting Associated Press, that EDS had supposedly "posted a profit in 2004 after a year-earlier loss."  The only way a net loss can become a profit is if you include the "income from discontinued operations," per the above table.  Is that what the EDS board must had done when awarding Jordan the $1.1 million bonus? 

Jordan also received about $120,000 in other compensation, including some $63,000 for personal use of a corporate aircraft, and options for 1.1 million shares, according to the Securities and Exchange Commission proxy filing.

Nor was he the only one to revel in the sweetness of the EDS executive suite.  Jordan's old pal Charles Feld, and his sidekick, Stephen Schuckenbrock, formerly of Feld Group, were paid salary and bonuses of $1.18 million and $1.07 million respectively (also see "Cronyism Is Alive and Well at EDS," Jan 2004).

If that's an example of the new "activism" and "vigilance" on America's corporate boards, ouch... independent investors had better look for a fox hole in which to hide.

EDS Among 10 Least Admired American Corporations, Say 10,000 Peer-Executives

PHOENIX, Apr 4 – While the EDS board was awarding its CEO a fat bonus for a lackluster 2004 performance, the company's corporate peers saw the EDS reputation as a dismal failure.  In the Fortune magazine's 2005 rankings of America's "most admired corporations," EDS ended up in the bottom 1% (between 576 and 579 places out of 582 contestants) in seven of eight individual rating categories.  Only some of the lowly airlines placed lower.

As for the quality of EDS management, EDS came in as 579th out of 582 companies.  And that rates a $1.1 million bonus for its CEO?

Here is how EDS ranked in the seven individual Fortune categories:

Management              

579th out of 582 companies
Innovation 579th out of 582      "
Financial soundness 579th out of 582      "
Use of Assets 579th out of 582      "
Products/Services 579th out of 582      "
Long-term investment 577th out of 582      "
Employee talent 576th out of 582      "

And now, take a look again at how Wall Street ranks the same company:

A stock worth $9 or less in comparison to its peers is trading at more than double that ($20.67 - see "An Upside-Down View," Mar 2005 and "EDS: Grossly Overpriced Stock," Feb 2005).  How's that possible?  Because 90% or more of EDS shares are held by institutional investors (see "EDS Booster Club Fees Rise," Mar 2005).

The Fortune ratings, on the other hand, represent the view of the company as seen by a much wider independent business audience, many of whom are EDS customers.  The survey measures corporate reputations based on input from about 10,000 business executives, directors and financial analysts whom Fortune asked to select 10 companies they admired most, regardless of industry. (For more on the Fortune survey methodology, click here - but you have to be a subscriber).

The Fortune "most admired" survey results sugegst that you can fool some people all the time; and all people some of the time; but you can't fool all people all the time.  Wonder if the EDS board members read the Fortune while frittering away their shareholders' one?

Hurd's the New Word at HP

NEW YORK, Mar 30Mark Hurd is the new word at HP - literally and figuratively.  The company announced this afternoon that its board has named NCR's CEO Mark Hurd, 48, to serve as the company’s new CEO.

Patricia Dunn, HP’s non-executive chairman, said that the board unanimously selected Hurd.

“Our search for a new leader to return HP to sustained success has been focused and thorough,” said Dunn. “A screening team of board members, consisting of myself, Jay Keyworth and Tom Perkins, established a broad field of candidates and interviewed many individuals. We then recommended the strongest contenders to the board as finalists. Each was interviewed by the entire board, and Mark was our top choice.”

Hurd will take up his new duties on April 1.  His compensation package was not disclosed.  

Hurd had spent 25 years at NCR, a 121-year old company that was the grooming ground for IBM's "founder," Tom Watson Sr., in the early 1900s.  In fiscal 2004, NCR generated revenues of $6.0 billion, up 7% from a year earlier, as net income rose nearly five-fold to $290 million.  More importantly for HP shareholders, the NCR stock rose 332% since Hurd became its CEO two years ago.  But not today...

Although Hurd's selection wasn't announced until after the market closed, rumors of the choice drove HP shares up $1.99, or 10%, to close at $21.78 on the New York Stock Exchange.  NCR shares, on the other hand, slumped 17% to close at $31.40.

Guess that says it all... at least from Wall Street's perspective.  

Hurd: HP's New $7.5 Billion-Man!

PHOENIX, Mar 31 – Have you heard how much Hurd is worth?  Well, according to an HP regulatory filing as of late Tuesday (Mar 29), the new HP CEO will receive a signing bonus of $2 million, and an annual base salary of $1.4 million.  But Hurd could earn substantially more under various short- and long-term incentive programs, the document said.

On his first day on the job, for example, Hurd also will be granted a stock option to purchase 700,000 shares that will vest at a rate of 25% a year, starting on his first anniversary with HP. He also will be granted additional options and restricted stock to compensate for NCR shares he forfeited when he left that company.

So that would suggest Hurd is worth a few million dollars a year, right?  Forget it.  He has already proven that he is worth $7.5 billion - a day! 

Take a look at the above chart.  When the news of Hurd's appointment hit the Street, HP's market cap rose by over $6.3 billion, while NCR's dropped by over $1.1 billion.  And now, two days later, we see that both stocks got to keep their gains/losses whose aggregate value is about $7.5 billion.

So Mark Hurd is HP's new $7.5 billion-man.  At least that's what we Hurd on the Street...

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT:  EDS Executive Suite; HP's New CEO (Mar 2005); An iSeries Revival (Mar 2005);  EDS Booster Club Fees Rise (Mar 2005);  An Upside-Down View (Mar 2005);   The Worst of Both Worlds (Mar 2005);   Octathlon 2005: Accenture Wins (Mar 2005);  IBM Global Services: Smaller, Shorter - Better? (Mar 2005);  IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); 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)

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

Volume XXI, Annex Newsflash 2005-10
March 30, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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