Consulting
References Practices Case
May 13, 1994
| The discussions have involved several possible arrangements, from a complete merger to swapping stakes in one another to setting up a partnership in which each handles what it does best. As a data-processing expert, EDS could take over Sprint's massive billing and back-office operations; Sprint could run EDS's extensive networking requirements, including highspeed transmission lines for corporations whose back offices are run by EDS.
The Sprint-EDS talks come at a time when GM appears to be stepping up efforts to make EDS more attractive to a potential partner. GM this week said it secured an agreement from federal pension regulators to release EDS from liability for GM pension funding "if EDS leaves the GM corporate group." The release is part of a proposed deal under which GM would give its pension funds $6 billion in GM Class E shares, which are tied to the performance of the EDS unit, to offset a $22 billion unfunded pension liability.
Last year, GM executive vice president Harry J. Pearce, who oversees EDS, said GM would consider selling a stake in the profitable data-systems operation if that's what it took to secure the strong telecommunications partner that EDS needs.
A GM spokeswoman yesterday said the auto maker has no comment on discussions with potential EDS partners, or on whether ~GM plans broader changes in the unusual :,structure of GM Class E stock that would facilitate the sale of a stake in the unit. GM class E shares represent only a claim on ,EDS's dividends, not ownership of EDS assets, which are the property of GM and its common shareholders. That distinction ::contributed to the decision last year by British Telecommunications PLC to back out of a deal to buy as much as 25% of the shares as part of an alliance with EDS.
EDS and Sprint could use each other.With the third-largest long-distance service, a well-known national brand, local - phone companies and the fastest-growing U.S. cellular service, Sprint, based in Westwood, Kan., could make EDS a central player in the multimedia revolution, which s. a stated goal of both EDS and GM.
Sprint will either have to build its own data-processing expertise or use EDS's, particularly in the multimedia future when voice, data, video and wireless services coalesce. Sprint wouldn't comment on the EDS talks. But in the past, Chairman William Esrey has said the networks of the future will require complex management systems for handling billing, fraud protection and network monitoring.
Sprint appears set for a transformation with or without EDS, industry executives say. "Esrey is a guy who likes to do deals and he's determined to put something together," a Sprint manager said.
Sprint has been holding separate talks on a major expansion in wireless communications, industry executives say. Sprint wants to turn its cellular service into a nationwide brand-name offering to compete with services planned by the teams of AT&T Corp. and McCaw Cellular Communications Inc., and MCI Communications Corp. and Nextel Communications Inc.
To make this happen, Sprint has been seeking a broad partnership with other cellular phone companies, including the cellular units of the regional Bell companies. The new team would market a new national service under the Sprint brand. Sprint's is the only recognizable brand that can compete with AT&T's and MCI's on a national basis.
The service could be set up as a new wireless company to be owned by Sprint and its partners, or Sprint has also proposed forging a marketing and trafficsharing arrangement with other carriers nationwide. Under the latter structure, each carrier would agree to pass voice and data calls to the other whenever their customers roam from their regular service regions and share in the revenue. EDS could become the crucial data cruncher of this traffic.
People familiar with the talks said these potential partners include Air Touch Communications, the former cellular unit of Pacific Telesis Group, and U S West Inc.'s New Vector wireless company Those companies wouldn't comment.
A couple of years ago industry expert would have scoffed at an alliance between EDS, the nation's biggest, most successful provider of so-called outsourcing services for corporations, and Sprint. Disastrous marketing had turned Sprint into hapless loser and its market share slipped badly. But Sprint has rebounded, thanks a niche marketing campaign (with "Murphy Brown" star Candice Bergen) that has targeted well-heeled long-distance consumers and neglected small businesses. People inside the company said Sprint may even sell a small stake to a foreign carrier looking for a U.S. hub. After all, MCI did the same thing with British Telecommunications for $4.3 billion.
GM has lots of incentive to translate at least some of EDS's estimated $16 billion in market value into cash that can finance its restructuring efforts. If GM gets final government approval to contribute 177 million Class E shares to its pension fund for hourly workers, the fund could eventually sell those shares and reduce the amount of cash GM needs to funnel away from new-product development. After Dec. 31, GM also could simplify matters by exchanging Class E shares for regular GM common stock at a 120% premium over the Class E stock's market value.
Another advantage of the proposed shift of Class E stock to the pension trust, analysts say, is that GM'S pension fund could sell Class E shares without incurring a big capital-gains tax liability. One reason GM has balked at selling EDS is the steep tax bill now indicated by EDS's huge premium over its original $2.5 billion purchase price.
In New York Stock Exchange composite trading, Sprint shares fell 62.5 cents apiece to $36.125, while GM Class E shares fell 87.5 cents to $32.875.
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