EDS gets uptick on Navy deal, faces challenge of organizing

Electronic Data Systems has found the perfect antidote to a sagging stock price: a $6.9 billion deal that is the largest government outsourcing contract ever awarded.

3 min read
Electronic Data Systems has found the perfect antidote to a sagging stock price: a $6.9 billion deal that is the largest government outsourcing contract ever awarded.

And although the Navy contract awarded to EDS on Friday has given the company's slumping stock a big boost and raised its corporate profile, EDS still faces challenges on this deal, analysts say.

"EDS is the lead and has won the contract, but it certainly involves more entities than just EDS," said Tom Rodenhauser, an analyst at Consulting Information Services. On this effort, EDS is partnering with Raytheon and WorldCom and with subcontractors such as Cisco Systems, Wamnet, Dell Computer and Microsoft.

"There's a lot of computers, a lot of hardware and customized software involved, and...a lot of integration work. The challenge with something like this is making the partnerships work," Rodenhauser said.

Under the multiyear contract, EDS and its partners will tie together some 360,000 Navy and Marine personnel by giving them access to a common intranet and multiple databases.

The deal also helps position EDS at a time when most Internet consulting companies, like Viant, iXL Enterprises and US Interactive, are suffering from an abrupt market shift away from serving dot-com clients and scrambling to land larger contracts like this one with the Navy.

"The fact that EDS won this deal shows they continue to be a very legitimate player in the government (outsourcing) business," said Meta Group analyst Val Sribar.

Government outsourcing is turning into a lucrative market as more federal agencies continue to offload most of their computer-services needs, largely due to the decreasing levels of the technology talent pool, Sribar said.

"This is an important growth area for EDS and its (close) competitors," he added.

EDS shares jumped nearly 15 percent in early trading Monday. Shares of the old-line services giant, which has reported lackluster revenue growth in recent quarters, had previously fallen about 32 percent for the year.

EDS issued a revenue warning in June owing to changes in its sales organization that sent shares plunging 25 percent. It was a setback for chief executive Dick Brown, who has set a company-wide cost-cutting plan to jump-start sales and profit growth. At the time, the company said revenue would improve in the second half of this year.

Executives at Plano, Texas-based EDS said they expect the contract to boost incremental revenues annually between 3 and 5 percent in 2002.

"We're elated, we're gratified to have been selected, but we're not surprised," said EDS chief executive Dick Brown.

Wall Street analysts don't expect EDS to generate significant revenues from the deal for at least six to nine months. Salomon Smith Barney expects the $6.9 billion outsourcing deal to generate at least $100 million per quarter for EDS. The firm expects EDS to garner greater profits from the deal as time goes on, since initial costs for telecom and computing equipment will decrease, and EDS is eligible for bonuses if it exceeds performance goals.

As part of the contract, the Navy has stipulated that a second, unnamed contractor has been named should EDS' work fail to meet contractual requirements, PaineWebber analyst Andrew Burns said in a report on the deal issued Monday. EDS beat out competitors Computer Sciences and IBM Global Services, as well as defense contractor General Dynamics.