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Tech Industry

EDS closer to state outsourcing deal

Electronic Data Systems grabs a $1 billion, seven-year outsourcing contract to take over computer systems for the State of Connecticut.

Electronic Data Systems today grabbed negotiating rights to a $1 billion, seven-year outsourcing contract to take over computer systems for the state of Connecticut.

The huge contract, which must be hammered out in the coming months during negotiations with EDS and approved by the state legislature, will make Connecticut the first state to privatize its data processing and telecommunications systems. EDS, the world's second-largest services and consulting firm, was picked over rivals Computer Sciences (CSC), IBM, the Connecticut State Employees Association (CSEA), and a joint proposal by CSC and the CSEA.

EDS's stock was trading at midday at 50.938 a share, up 1.875 and surpassing the company's 52-week high.

"EDS was judged the most capable of developing the advanced technology environment the 21st-century state government requires," said Rock Regan, chief information officer of Connecticut's information technology department.

However, some analysts believed the contract would go to CSC/CSEA, mainly because some state legislators, who initially opposed privatization, seemed to support the idea of the unique alliance between state employees and CSC.

"I wasn't expecting [EDS]," said Gary Helmig, analyst at SoundView Financial Group in Stamford, Connecticut, who thought the deal would go to CSC/CSEA or IBM. "Maybe EDS came out with a price they couldn't refuse."

Helmig said the deal won't impact EDS's finances in 1999, as the company will need to jump through several hurdles before the project starts, including contract negotiations with the state's IT department, an auditor's review, and passage through the state legislature. That could take up to six months, he said.

Once the deal is sealed, EDS will open a technology transfer station in Hartford to serve as the state's new IT headquarters. The services giant plans to recruit information technology workers from the state government and the private sector.

The new systems EDS will build are expected to take the state's government into the 21st century, connecting thousands of computers at dozens of state agencies that presently do not talk to each other. EDS's team of subcontractors includes Unisys, Xerox, and Lucent Technologies.

In the meantime, today Merrill Lynch analyst Steve McClellan upgraded the company's stock from a neutral rating to "near-term accumulate," noting new leadership could revitalize the company. EDS stock has steadily climbed since the company appointed new chairman and CEO Richard Brown, former head of Cable & Wireless and a highly regarded telecommunication industry veteran, earlier this month.

Brown, renowned for his 21 deals and acquisitions during his 29 months at Cable & Wireless, is expected to help turn EDS around. EDS has suffered in recent quarters due to falling contract revenue from its former parent company GM.

In the fourth quarter of 1998, the company's revenue from GM could decline 5 percent due to $200 million in business the automaker has put up for competitive rebid, according to a Morgan Stanley Dean Witter report. For the quarter, Morgan Stanley expects EDS to report overall contract signings of $3 billion to $4 billion, compared with $5.8 billion in the year-ago quarter.

EDS's stock price has declined 7 percent over the past two years and the company's revenues have been growing in the midsingle digits this year. By contrast, IBM, whose computer services business made up nearly one-third of its $78 billion in 1997 revenues, has been growing in excess of 20 percent per year.

Reuters contributed to this report.