Computer services giant Electronic Data Systems has taken its first steps in a plan to raise liquidity by selling its consumer network services unit to transaction and data processor Fiserv
for $320 million in cash.
The sale of the unit follows EDS’s recently-announced plan to shed $500 million worth of non-core assets after it announced third quarter profits that fell by 59 percent, partly due to the bankruptcies of two clients, WorldCom and USAirways.
The CNS unit is one of the largest electronic funds transfer processors and automated teller machine operators in the country and considered a good strategic fit for Fiserv. Coley Clark, president of EDS’s financial global industry solutions, said although the CNS unit was profitable, it is not core to the company’s long-term growth plans.
“EDS will continue to serve its financial services clients and remain focused on developing opportunities in IT and business process outsourcing, and business transformation services, our market strengths,” he said in a statement about the sale. The company estimates that about 16 percent of its annual revenue is generated by its work for financial services firms.
The sale comes as EDS weathers a string of bad news announcements in recent months. In September it lowered its revenue outlook due to an industry-wide slowdown in IT contracts. The Securities and Exchange Commission is also looking into some $225 million worth of stock transactions.
Last week, Proctor and Gamble announced it would not award EDS a major outsourcing contract that could have been worth about $7 billion over the life of the 10-year contract. The consumer products company instead plans to outsource different parts of its back-office operations to other vendors.
This week, news came that JP Morgan Chase decided to negotiate exclusively with IBM for a multi-year outsourcing contract worth about $5 billion. EDS had also been under consideration.
Although EDS and JP Morgan said EDS’s finances had nothing to do with a decision, the timing of the announcement didn’t help some analysts’ view of the company’s outlook.
Deutsche Bank said it is maintaining a “sell” rating on the stock for a host of reasons, naming the “uncertainty” of EDS’s contract renegotiations with GM, the ongoing SEC inquiry and cash flow projections, especially given the recent contract extension with the Navy that is holding up some of its cash flow for this year.
Another concern Deutsche Bank noted is the company’s increased liability to make payments to its pension fund. EDS said in a regulatory filing that negative market returns have “caused a significant decline” in its pension plans’ funded status. As a result, the company is facing a $350 million charge and a $120 million non-cash increase in its 2003 pension expense.
Shares of EDS have been sliding from the $30-$40 range since September to the mid-teens in recent days.
