EDS shows chief Brown the door

The troubled IT services giant ousts Dick Brown as chairman and chief executive, replacing him with Michael Jordan, the former CEO of TV network CBS.

Ed Frauenheim Former Staff Writer, News
Ed Frauenheim covers employment trends, specializing in outsourcing, training and pay issues.
Ed Frauenheim
3 min read
Troubled computer services giant Electronic Data Systems late Thursday announced that Dick Brown, its chairman and CEO, is leaving the company.

EDS said former CBS chief Michael Jordan will replace Brown in both roles. In addition, former top EDS executive Jeffrey Heller will emerge from retirement to resume the duties of president and chief operating officer for the Plano, Texas-based company.

"The EDS Board of Directors and Dick Brown mutually agreed it is in the best interests of the company to effect a leadership change at this time," Roger Enrico, an EDS director, said in a company statement.

In the statement, the company made oblique reference to problems that have plagued the services company in the past several months under Brown. These include a dramatic earnings warning in September, a formal SEC probe into the earnings warning and stock-hedging activity, and the revelation that the company has invested $430 million in a troubled contract.

EDS' board of directors believes the "new management team of Jordan and Heller has the opportunity to move EDS forward unencumbered by past events," according to the company statement.

Shares in the company have dropped nearly 60 percent since Sept. 3.

Analyst David Grossman with Thomas Weisel Partners said Brown was facing tough obstacles to regaining credibility and momentum for the company.

"I think the change would be perceived positively," Grossman said. But he added that the new leadership would have to demonstrate improvements with hard evidence. He rates EDS shares "market perform."

J.P. Morgan analysts Dirk Godsey and Christine Pezino said in a report Thursday that they believed "these actions have been long-awaited by many shareholders following the company's September shortfall" and that "these management changes were an inevitable part of restoring investor confidence..." But they reiterated a cautious "underweight" rating on the stock. They wrote that "risk to the outlook remains as management undergoes a transition period and engages in a sorting out process with respect to a very large, very complex business."

Brown, 55, took over the reins of EDS in January 1999. He had been chairman and CEO of Cable & Wireless in the United Kingdom.

New company head Jordan, 66, guided Westinghouse Electric as it became CBS. He retired as CEO and chairman of the TV network, now a unit of Viacom, in 1998. In the EDS statement, Enrico called Jordan a "proven leader and strategist with a track record of building shareholder value."

Returning executive Heller, 63, retired from EDS in February 2002, after 34 years with the company--most recently in the position of vice chairman. He served as president and chief operating officer from 1996 to 2000.

EDS spokesman Jeff Baum said the company intends to honor its contract with Brown regarding a severance payment. According to a regulatory filing, EDS' contract with Brown requires the company to keep him on its payroll for three years after either party terminates his employment.

According to a statement released by EDS on Friday, Brown will get a $12.4 million cash payment, as well as retirement benefits valued at $19.6 million, to be paid in monthly installments. The retirement benefits were originally scheduled to vest in December 2003. Brown will also get immediate vesting of 344,000 previously awarded deferred stock units worth $5.4 million, based on yesterday's closing price of $15.77.

EDS will take a one-time charge of 6 cents per share in the first quarter of 2003 to cover the severance package, the company said. Analysts were expecting the company to report earnings of 32 cents per share in that quarter, according to First Call.

The agreement also states that if Brown's employment is terminated by EDS without cause or by him for good reason, he will be entitled to benefits including a payment equal to three times the sum of his annual salary and the greater of his most recent target or actual annual bonus payment, as well as immediate vesting of his supplemental retirement benefit, restricted stock and stock options.

Brown's salary for 2001 was $1.5 million, and he received a bonus worth $7 million. In 2001, Brown also was given restricted stock valued at $27.7 million. Brown's compensation information for 2002 has not yet been made public.

Another clause in the employment agreement calls for EDS to cover any federal excise tax on "golden parachute" payments.