EDS Puts Credit Union Unit Up for Sale
By Josh Kosman
Published in The Daily Deal
March 17, 2003

Electronic Data Systems Corp. has put its credit union processing business on the auction block in what could be an attempt to avoid larger asset sales.

In late February, EDS, the second-largest technical services and consulting firm in the world, hired Greenhill & Co. to conduct a general strategic review of its business as it looks to pare assets and reduce debt, a source said. Several weeks later, Greenhill helped EDS launch a formal sale process for the credit union unit, several sources said, hoping to attract as much as $500 million. The business, which generates about $18 million in annual Ebitda, offers data processing, Internet banking and bill paying, telecommunications, statement services and automated teller machine and debit switching services to credit union clients.

An EDS spokesman would not comment on the credit union sale. But in October, the Plano, Texas-based company announced plans to shed certain noncore, nonstrategic assets to raise $500 million in cash by the end of the second quarter. EDS is already more than halfway there.

In December, the company sold its consumer network services business, which handles electronics funds transfers and operates ATMs, to Fiserv Inc. for about $320 million. And it is finalizing the sale of its magazine subscription fulfillment business, formerly known as Neodata, to an unknown buyer for a price likely less than $20 million, according to Circulation Management magazine.

But much more could come.

"The interesting question is whether they will look at bigger pieces," said Marshall Sonenshine, head of New York investment banking boutique Sonenshine Pastor & Co. "Is this step one of a two-step process"?

Falling business from its biggest customer, General Motors Corp., has hurt EDS. Problems managing service contracts with troubled clients, including WorldCom and United Airlines have also been worrisome for the software services giant.

"EDS is in a broad category that is seeing declining revenues, margins and stock valuations," Sonenshine said. "Their problem is compounded by the fact they have $5 billion of debt on their balance sheet. And debt and software services are not a good mix in a recession."

Sonenshine knows EDS well, having advised Structural Dynamics on its sale to EDS for $950 million in 2001. The deal was part of an EDS acquisition spree from 1997 through 2001. During that period, EDS announced six acquisitions valued at $4.28 billion. When EDS announced the $172 million buy of Unigraphics in August 2001, its last large acquisition, its stock was trading at more than $60. Today, it trades at about $15 a share.

For the moment though, EDS has options. In 2003, the company will have $700 million in free cash flow after meeting its debt obligations and not including asset sales, said William Loomis, a Legg Mason Inc. analyst. EDS generates $1.9 billion of operating income from its $22 billion of revenue. Still, Loomis says he believes EDS must streamline.

According to Loomis, EDS needs better internal controls so it understands the service contracts it signs with its clients and their implications. EDS said in late February that it risked not meeting its 2003 earnings target partly because of problem contracts.

"My guess is EDS is looking to sell smaller pieces because it does not want to go into a larger sale mode when it is in a weak position in a bad market, and would rather wait and see if it can can steer through this recession," Sonenshine said.

Excess baggage?
EDS's acquisition history

Announced date	Target	Price($mill.)
August-97	Neodata Corp.*	277
April-99	SHL Systemhouse Inc.	1,650
March-01	Sabre Holdings Corp.	660
	(outsourcing and software unit)
April-01	Systematics AG	570
May-01	Structural Dynamics Research Corp.	950
August-01	Unigraphics Solutions	172

*EDS is in final negotiations to sell for probably less than $50 million.