General Motors Making Moves That Presage Spin-Off of EDS

The automaker has pulled out almost half its dividend interest in Electronic Data Systems to fund a pension shortfall

General Motors has moved one step closer to spinning off its Electronic Data Systems Corp. unit, one of the world's leading systems integrators.

The Labor Department March 13 cleared the way for the automaker to pull $6.3 billion, or 173 million shares, out of its Class E common stock - GM's dividend interest in EDS - and transfer the shares to its underfunded pension plan for 600,000 autoworkers.

GM pays 30 percent of EDS' earnings from the previous year in dividends but still maintains full equity interest in the infotech subsidiary. GM now owns only 8 percent of Class E common stock. GM's capital stock, with 484 million shares valued at $41 a share, represents the company's actual ownership of EDS.

The contribution of 173 million shares represents more than 20 percent of GM's total pension plan assets and 44 percent of all GM Class E stock. Federal regulations prevent companies from contributing more than 10 percent of their own stock to finance pension plans and limits those contributions to 25 percent or less of a specific class of stock, such as Class E. Labor officials said they granted a waiver to give autoworkers greater financial security.

Analysts agreed both companies already have reaped the benefits from the parent-subsidiary relationship and a spin-off is the next logical step. GM officials, analysts said, would prefer spending time managing their core business rather than managing a $10 billion subsidiary. A spin-off would give EDS more financial freedom and would free it from funding GM's pension plan.

The agreement between the government and GM places control of the stock contribution with U.S. Trust Company of New York, an independent trustee. At the end of 1994, GM's hourly pension plan had a $12.6 billion shortfall, compared with $22.3 billion at the end of the previous year.

Dick Bove, senior vice president at Raymond James & Associates Inc. of St. Petersburg, Fla., said the transaction, approved by the Labor Department, illustrates the political muscle of the United Auto Workers union and GM. The next regulatory challenge GM faces is to conduct a spin-off of EDS without having to pay billions of dollars in taxes, he added.

GM may own EDS but not in the same way it owns its Pontiac or Buick divisions. GM does not run EDS and cannot directly affect its operations, Bove said. "I haven't seen anything like this in corporate America, where a company is forced to pour money into another company and hardly get any benefit from it," he added.

GM spokeswoman Toni Simonetti said she is aware of the speculation of a possible spin-off but stressed that the automaker does not plan to sell EDS. GM, she noted, announced plans to conduct the stock transaction more than a year ago.

GM officials said they have not ruled out an EDS spin-off.

GM could try to sell EDS, but analysts believe previous, unsuccessful attempts have made the automaker gun-shy. In the early '90s, GM officials failed to strike a deal with MCI Communications Corp. when a management shakeup ousted their then-chairman Robert Stempel.

Discussions with British Telecommunications plc fell apart in 1993 after GM decided it wanted $5 billion for a minority interest in EDS. The United Kingdom's leading telecom service supplier reportedly would not pay more than $4 billion. Last year, GM found another large telecom company, Sprint, to partner with EDS. Once again, the deal did not materialize.

A spin-off, Bove said, has emerged as the most viable option as long as GM can do it tax-free. The simplest way GM could do the spin-off, he explained, would be to create a separate EDS stock and eliminate the Class E stock and the capital stock shares that represent GM's ownership of the infotech firm. The entire process could take nine months to one year to complete, Bove added.

GM bought EDS in 1984 for $2.6 billion. At that time, EDS had revenues of $947 million. Last year, it set a record $10 billion in revenues, 17 percent higher than in 1993, and made $822 million in profit. In 1994 alone, the Plano, Texas, infotech firm booked $9 billion worth of new contracts. Earnings per share of the Class E stock rose 13.2 percent from $1.51 in 1993 to $1.71 last year. At the end of 1988, the Class E stock was valued at $11.25. Today, it trades at about $40 per share. Soon after its acquisition, EDS built a solid business base from GM organizations, especially those overseas. Today, however, revenues from sources outside the GM family continue to outpace those from the parent company, with 64 percent of 1994 revenues coming from non-GM sources.

EDS operates one of the world's largest private computing and communications networks, EDSNET, and recently entered the hardware manufacturing business. The 30-year-old infotech company now has 75,000 employees worldwide, serving more than 8,000 customers in 35 countries. EDS' parent company has started to recover in recent years from the financial doldrums of the late 1980s into the early 1990s. GM sales and revenues last year totaled $155 billion, a 12.1 percent increase from 1993, and its net income set a $4.9 billion record last year.

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