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EDS board shake-up could bring change

Electronic Data Systems could be ringing in the New Year with some new blood and a redefined direction.

Electronic Data Systems could be ringing in the New Year with some new blood and a redefined direction.

After three decades, the old guard of EDS is exiting while the company's once-thriving business model is "creaking and groaning," SoundView Technology Group analyst Gary Helmig said.

Think streamlined for the world's second-largest computer consulting firm, analysts say. Fewer aircraft for executives. A less bloated advertising budget. A more modest corporate headquarters.

"We'll probably see a more Spartan organization," said Steve McClellan, analyst at Merrill Lynch in San Francisco.

Helmig believes it will be a lofty challenge to turn EDS around, mainly because the company is still suffering from sliding profits from its 1996 spin-off from General Motors.

Adding to the challenge is the departure of a slew of executives in the past few months, most recently vice chairman Gary Fernandes, 55, who made the announcement Monday, amid speculation that he was disgruntled over not being named chairman and chief executive to replace Les Alberthal.

As a result of the separation from GM, EDS lost some of its lucrative computer service work with the auto giant due to competitive bidding. GM now represents about a quarter of EDS revenues--down from about 80 percent in 1986. While EDS this year has won contracts with Bell South and Australia's Commonwealth Bank, the company is still largely dependent on GM revenue.

For the third quarter ending September 30, EDS saw its revenues from GM drop $32.1 million, or 2 percent, to about $1 billion. For the nine-month period ended September 30, revenue from GM fell $148 million--or 5 percent--to $3.1 billion.

In the coming months, Tom Grace, an analyst at AMR Research, said he sees EDS redefining itself by moving beyond general IT management to more specific niche vertical applications.

"They were late to the packaged applications boom," Grace said. "If you look across the market, a lot of what people are doing is improving performance of factories EDS stock chart and manufacturing, and EDS is well-poised to do that."

Overall, analysts expect the new crop of executives to cut company overhead and improve profitability, helping restore the waning faith of investors and clients.

Alberthal's planned departure, announced in August, resulted in a third-quarter charge of $36.7 million, or 5 cents per share, to cover his executive pay-out package, which raised some eyebrows. Fernandes's departure will lead the company to take a fourth-quarter charge of $13 million, or 2 cents per share, to cover his retirement plan, mostly for unexercised stock options.

Alberthal has said he will step down once his successor is named, probably by the end of the month. The company is also searching for a chief financial officer to replace Jody Grant, who retired in March. Analysts said they won't be surprised if Jeff Heller, another 30-year veteran and the company's president and chief operating officer, leaves at the beginning of next year as well--that is, if he's not named the new CEO. The vice chairman's position, created for Fernandes, is expected to remain unfilled.

EDS could not be reached for comment.

While many names have been tossed around as Alberthal's possible replacement--from Oracle chief operating officer Ray Lane to George Shaheen, chief executive of Andersen Consulting and retired American Airlines chief Bob Crandall--the company is widely expected to be forced to hire from outside the consulting industry. The search is being led by the board's governance committee. Sam Palmisano, acting head of IBM's rival Global Services business, another rumored candidate, is expected to stay at IBM.

"The big heavyweights have dropped out of the competition," McClellan said, as several candidates publicly stated they won't take the job because of contract obligations or conflicts of interest.

Nonetheless, McClellan said the seat should be filled by January 1.