EDS Unloads Software Unit for $2B

In a major bid to shed non-core assets and focus on its bread-and-butter IT outsourcing business, Electronic Data Systems has sold its UGS PLM Solutions unit to a group of three private equity firms for $2.05 billion.

The firms, Bain Capital, Silver Lake Partners and Warburg Pincus, will own equal shares in the provider of product data management, collaboration and design software applications and services. The buyout firms called the transaction the largest private equity investment ever made in a technology company.

The cash from the deal comes just in time for EDS. In October, the Plano, Texas, company announced it was shopping UGS PLM Solutions after reassessing its holdings and drafting a new strategic plan in order to maintain a competitive edge with rivals such as IBM , CSC and other IT vendors who have been looking to snatch deals from EDS.

UGS PLM Solutions, which counts General Motors and Boeing as customers, is a solid software business ($897 million in revenue and $104 million in net income last year); but EDS said it had to sell the unit because it is “clearly outside our core focus.”

“We took a look at all the options and ultimately decided that this would
deliver the best value and give [UGS PLM Solutions] an environment to move
forward and succeed,” EDS spokesman Sean Healy told internetnews.com.

The decision to sell all of UGS PLM, rather than one product line at a time,
was made because the interest in the market. The Bain-Silver Lake-Warburg
Pincus consortium outbid another suitor, Healy confirmed.

Along with Dassault Systemes , UGS PLM is a major player in a market that CIMdata analysts expect to grow by a compound annual growth rate of 8 percent through 2008 to more than $14.5 billion. Engineers use PLM software to bring products from the drawing board to production.

A source familiar with the situation said the new owners are “totally supportive” of UGS PLM Solutions CEO Tony Affuso and his team and expect him to stay on.

EDS took the design software community by surprise in May 2001 when it announced it would buy Structural Dynamics Research Corp. (SDRC) for $950 million. The company later became UGS. Many considered it a back-door move by the services company to get a foot in the door with manufacturing giant Ford Motor Co.

Since then, however, times have changed. EDS’s management team had trouble explaining to shareholders why EDS should hold onto a billion-dollar subsidiary, especially in the face of a heavy debt load and mounting job cuts.

The deal comes as EDS puts a difficult year behind it. During 2003, technical problems with its $7 billion outsourcing deal to build the Navy and Marine Corps a new intranet ran delayed the time frame in which the company could start collecting cash flow on the contract.

It is also wrangling with a Securities and Exchange Commission probe into how EDS took a write-down on losses on that project.
And overseas, EDS lost a 10-year, $5 billion contract with customer Inland Revenue, a U.K. government agency.

The sale of UGS PLM Solutions is expected to close within 90 days. When it does, the Plano, Texas-based EDS expects to be closer to its goal of zero debt by year’s end.

EDS said it would provide further detail and updates to its 2004
forecasts during its first-quarter earnings call.

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