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Why Perot Systems' IPO glory fizzled

The company's IPO share price of $85 is down to less than $20, and analysts say it's an unfortunate trend facing systems integrators.

When Perot Systems went public in February it sparked a frenzied rally that quickly drove the stock from $16 to $85 per share.

A lot has changed over the past eight months, however, and the company has quickly retreated from a stock market wonder back into the computer services closet.

Although the $994 million company's income doubled in the second quarter and the firm has performed to Wall Street expectations, its stock has slid nearly to where it started, trading today at 18.44 per share. Even today's $700 million contract with Harvard Pilgrim Health Care--Perot's second-largest ever--failed to move the stock.

Analysts say the steady decline over the past several months underscores a larger problem that traditional systems integrators and outsourcers face in the Internet-driven stock market: They can't build the excitement of younger counterparts such as Scient, Viant, and Proxicom, and they are relegated to the back of the investor portfolio as the long-term buy.

Ironically, analysts say, Perot's post-IPO plunge was to be expected of an 11-year-old company that's more about the nuts and bolts of computer systems technology than Web flash. At the time it went public, many investors mistook Perot for an Internet player--a role far from its core work as a buttoned-down outsourcer and systems integrator that is only starting to dip into e-commerce. And it didn't hurt that the company was founded by Texas billionaire and two-time presidential candidate Ross Perot.

"They positioned themselves as another Web services firm," Meta Group analyst Stan Lepeak said. "Anyone looking at them sees that that's not the case."

Lepeak said the stock decline proves that the value of being a good services firm cannot match the glamor factor that the Web's image carries on Wall Street.

"The technology world is bipolar now," adds Michael Geran, analyst at Pershing, an arm of Donaldson Lufkin & Jenrette, who rates the stock a long-term buy. "Either you've got it and you're great or no one pays attention to you. Dull is not beautiful anymore."

Geran said though these older IT services firms are now out of favor and are struggling with some Year 2000 project delays and slower growth than start-ups, they will continue to grind out good results and serve as a stable investment. For the second quarter, Perot reported revenues increased nearly 20 percent, to $282 million. The company, the world's sixth largest outsourcer, reported revenues have more than tripled since 1994.

"Eventually they'll get rewarded again," Geran said. "People just aren't interested in stocks unless they go to extreme valuations."

What led to the stock decline? While Hambrecht & Quist remains bullish on Perot, reiterating a buy rating on the company's stock in May, Morgan Stanley and Bear Stearns, both underwriters, rated the stock at neutral when they initiated coverage on the company in March and shares were trading in the 40s. And in August, millions of shares owned by firm employees and executives became tradable, a key fact which analysts say contributed to the stock drop.

"The negative impact it's had is the lock-up on the shares from the IPO," said Barrington Research analyst Michael Hutchison, who rates the stock a long-term buy.

Hutchison said only a small number of stocks in the old-school technology services market is faring well. And although Ross Perot is considered by some as the grandfather of the industry, having founded EDS, Perot remains a "relatively underfollowed story" by influential industry analysts, he said.

The company does get lost in the mix to some extent because it competes in the middle market against comparably larger firms EDS and IBM Global Services, as well as the start-ups, analysts said.

"(Perot) has the better set of skills but not necessarily the flashy set of skills," Meta's Lepeak said.