EDS Ousts Brown But Not Before Paydate

Struggling number two computer services firm EDS has ousted Richard Brown, its chairman and chief executive officer, though not without a hefty price.

The company made the move as part of a management shake up in the senior ranks and replaced him with the former CEO of CBS, Michael Jordan. But Brown’s severance package, which EDS created in December 1998 as part of its bid to lure Brown away from Cable & Wireless, will force the company to record a one-time charge of about 6 cents per share for first quarter 2003.

Brown’s package includes a $12.4 million cash payment, the vesting of 344,000 deferred stock units valued at $5.4 million (based on Thursday’s closing price of $15.77), and retirement benefits with a present value of $19.6 million which will be paid in monthly installments.

EDS also said the severance package includes the continuation of certain other benefits and acceleration of unvested stock options.

The changes at the Plano, Texas, company come in the midst of a difficult period for EDS, which is facing a regulatory probe over how it accounted for a stock hedging transaction, difficulty with some of its big outsourcing contracts, slowing IT spending by clients, and a stock price that has fallen by 75 percent in the past year.

The company also brought back retired EDS executive Jeff Heller to take over as president and chief operating officer, a role he held from 1996 to 2000, as part of the executive changes. Heller was with the company for 34 years when he retired in February 2002.

The ouster and replacement of two top executives marks the third major change to its senior management ranks since Chief Financial Officer Jim Daley retired in January and was replaced by Bob Swan.

In a statement about Brown’s departure, Roger Enrico, a director of EDS, said the “EDS Board of Directors and Dick Brown mutually agreed it is in the best interests of the company to effect a leadership change at this time. We thank Dick for his many contributions to EDS. The company’s organization, client service and competitive position are all stronger today than they were four years ago. We look forward to a smooth management transition.”

EDS has been struggling to regain its footing in the face of a sharp drop in IT spending among clients. In September, its stock fell by close to 50 percent after it had to change its outlook from a bullish 74 cents per share for the third quarter, to between 12 percent and 15 cents, a drop of about 80 percent. When its results for that quarter were released, EDS announced a 59.4 percent drop in its profits over the previous year’s quarter, and said it would trim 5,600 jobs and sell off over a half billion dollars worth of non-strategic assets.

Even more troubling for analysts at the time was the news that EDS had signed about $3 billion worth of contracts during the quarter, roughly half as much than the same quarter in 2001. For 2002, EDS’s profit was down by 18 percent to $1.1 billion on revenues of $21.5 billion, up slightly from the year before.

An expansion of a Securities and Exchange Commission probe in October regarding its stock sales and recent earnings guidance increased the pressure on the company.

The SEC probe is related to a stock-hedging maneuver that cost EDS $225 million, and events surrounding a drastic cut in its earnings guidance from September.
The question over its move to spend $225 million on a stock hedging transaction raised questions about its liquidity at a time when its landmark, $6 billion outsourcing contract with the U.S. Navy was being held up for routine government reviews of major contracts.

Brown was brought into the company in 1998 in a similar shake-up. The 55-year-old was instrumental in hammering out outsourcing “megadeals” that later raised problems for EDS’s cash flow, such as the U.S. Navy outsourcing contract, which has since been given the go-ahead by defense department officials following a review of the contract.

Analysts had grown increasingly critical of EDS’s management since last fall as the sharp drop in IT spending was become even more apparent to the company’s outlook. Last week in its annual report EDS disclosed another problematic outsourcing contract that has so far cost it $430 million, “including receivables, prepaid expenses, equipment and software. This contract has experienced delays in its development and construction phases, and certain milestones in the contract have been missed.”

At a recent day-long meeting with analysts, the company’s new CFO, Bob Swan, noted “more risks than opportunities” in meeting its earnings expectations it made for 2003. But he didn’t change the company’s outlook for the year: earnings per share of between $1.80 and $2 a share and cash earnings of between $700 million and $900 million.

EDS expects its first quarter revenue to be between 3 percent to 6 percent lower than the same, year-ago quarter.

Shares had closed at $15.76 Thursday just before the announcement was made, but had risen slightly in after hours trading.

EDS said because of the management change, it would reschedule its 2003 annual shareholders meeting from April 22 to May 20.

Jordan left CBS as chairman and chief executive officer in December 1998. Before that post, he was a partner with Clayton, Dubilier and Rice, a private equity firm in New York. His career also includes 18 years as an executive with PepsiCo and consulting work with McKinsey & Company.