PLM: EDS’s Beacon of Hope

With its losses mounting and the size of its downsizing ever-expanding, EDS on Wednesday issued a quarterly report that has left little for its customers, employees and investors to desire.

But within the report and within the walls of its executive suites, one bright spot that analysts are pointing to is the Product Lifecycle Management (PLM) Solutions that EDS recently said it is trying to divest. And analysts see that decision as a sort of fishing trip to find out what the company is worth.

“It just seems what they’re really trying to do is figure out a way to position it and figure out what it’s worth,” said Dean Davison, META Group vice president and director, outsourcing and service providers strategies.

Amid a depressed IT spending environment, the Plano, Texas, services giant said the decision to spin off some of its holdings in the CAD software solutions was a financial one: to “strengthen its balance sheet.”

In this sense, it needs all the help it can get. With Wednesday’s results out the door, EDS now has twice delayed reporting its quarterly results — the first came after firing its previous Chairman and CEO Richard Brown.

But the CAD software environment has reached a maturation point and doesn’t have the sustainable revenue growth rates it once had, Kevin O’Marah, AMR Research vice president of research, recently told investors.

That coupled with talk of greater autonomy by PLM executives has given EDS’s new management team the confidence to give them a shot at independence — not to mention a chance to extract some value out of the billion-dollar investment.

“What (EDS) is saying is, ‘people like (PLM), they’re just not buying
it. It’s not like anyone’s getting rich on this stuff now; let’s do a
little bit of a marketing event where we spin out a piece, maybe we can get some cash out of it. Maybe we mess with the numbers enough to get some good valuation out of it,'” O’Marah said during a recent conference call.

EDS took the CAD community by surprise back in May 2001, when it
announced it would buy Structural Dynamics Research Corp. (SDRC) for $950 million. Many considered it a back-door move by the servicescompany to get a foot in the door with manufacturing giant Ford Motor Co.

Since then, however, times have changed. The new management team is having a difficult time explaining to shareholders why EDS should hold onto a billion-dollar subsidiary that’s outside your core competency. It becomes especially difficult when the unit you are trying to justify is confronted with flat sales in the wake of a heavy debt load and mounting job cuts.

“It’s not a main part of their core business, which is
services. It’s been one of those controversial things where they’ve
had to explain it (to everyone),” META’s Davison told internetnews.com.

Still, EDS officials are taking its strategic decision for PLM seriously though. When asked for a reply on what analysts were saying, Jeff Baum, an EDS spokesperson, reiterated the company’s desire to explore an initial public offering.

“We wouldn’t have any comment on their speculation at this point,” he said. “We believe (a spinoff) would provide PLM Solutions more
independence, make faster decisions and at the same time PLM would still benefit from the leverage and support of EDS.”

Analysts believe EDS will never completely sever its control over PLM and its TeamCenter product because of the valuable services component EDS can sell concurrently. Selling off the company means competitors can bid on deals with PLM.

“(PLM) has been saying, ‘let us go on our own, let us be more visible,'” O’Marah said. “I don’t think by any means EDS intends to give up the right of these PLM deals to be sort of competitively bid out to Accenture or anybody else; I think they’ll keep a tight grip on that.

“(PLM) has made very clear that EDS is their only services partner,” he continued. “They’re taking that account control point seriously. What EDS is saying is, ‘we don’t want to give up account control, what we want to do is let these guys at least come out from under the covers so that they can be seen.”

For now, however, business goes on as usual at PLM. The company recently signed a reseller agreement with Adobe. And, when the time is
right, Davison figures, an IPO will go off as planned.

“I would speculate that once they come up with a good valuation and make a decision, they would spin it off whether that happens tomorrow or 2006 is anybody’s guess,” he said.