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Electronic Data Systems faces SEC probe
Wednesday, October 02 2002
by John Cradden


The SEC in the US has begun an informal inquiry into the recent earnings warning
from EDS and how it traded options on its common stock.

The world's second largest outsourcing company has said it will "cooperate
fully" with the Securities and Exchange Commission and is confident that the
inquiry will confirm its actions were above board.



Rumours that investigation would commence began almost as soon a EDS issued a
profits warning on 18 September which said its third-quarter profits would be
between USD58 million and USD74 million, down from a July forecast of USD364
million. This warning triggered a sell-off in traditionally strong EDS stock and
the following week analysts began to issue critical reports, one of which noted
sour stock-market transactions. 



Following that, Electronic Data Systems said it had borrowed USD225 million to
buy back stock options issued to employees last year. The move was designed to
bolster the firm's slumping share price, but instead EDS stock deteriorated
further, falling to less than USD20 per share. 





The news comes hot on the heels of an announcement by the company that it is
considering serious cost-cutting measures and spinning off some of its divisions.
Chief Executive Dick Brown said in a letter to shareholders that the company was
reviewing its central strategy of chasing multi-million dollar contracts that
take years to produce revenues.





"While the market has spoken, you should know we believe it to be a substantial
overreaction," Brown said in the letter. "Though many of our previous
investors may have left us for the moment, our clients and our colleagues have
not."





Brown said that the company was financially stable and had the resources to
continue operations and attract new clients. The company is also investigating
how it failed to foresee the huge decline in earnings and revenue it recently
issued warnings on.





In the earnings warning, the firm said it expects revenue in its current quarter
to be USD5.3 billion to USD5.5 billion. Its prior forecast was for revenue of
USD5.8 billion to USD5.9 billion. The news had taken investors by surprise as it
was felt that the company still offered strong revenue growth as corporations
seek to save money during lean times by outsourcing their IT functions.





The company is thought to be particularly vulnerable because of problems with
bankrupt customers such as WorldCom and US Airways and delays in revenue from its
contract with the US Navy.





EDS Ireland, which employs over 400 people, has been working on a number of big
outsourcing contracts, including the outsourcing of IT support function for the
1,900-strong Ericsson and a eight year contract worth EUR24 million to provide IT
support for FLA Aerospace's European facilities in Dublin, Manchester, Stansted
and Copenhagen. Other major clients include Xerox and e-procurement company
Marrakech.





There has yet been no official response to the news of the restructuring from EDS
Ireland.