IBM – EDS: merger report dismissed
Too small to be a monopoly
Reuters reported early on Friday, 5 March that Electronic Data Systems "was in talks to sell all or part of itself" to IBM. IBM and EDS spokespeople refused to comment on the report. EDS is most likely to dispose of its product lifecycle management software unit (PLM) and IBM is already a prominent player in this sector.
The report of a possible acquisition failed to excite the investment community. Shares in EDS fell 1.47 per cent in early trading on Friday to $20.10, and shares in IBM fell 0.2 per cent to $96.18.
The timing of the speculation seems strange. If IBM is serious about acquiring EDS outright, it had a much better opportunity 12 months ago when a series of profit warnings at EDS triggered the departure of former CEO Dick Brown.
EDS' shares traded at $14.4 in March 2003, and it has recovered some significant ground since then under the leadership of Michael Jordan, who has overseen a major cost-cutting program. However, the company remains vulnerable with the SEC conducting an investigation into its contract with the US Navy, and any negative fallout later this year could make its market valuation more attractive to suitors.
But the reasons for IBM to steer clear of its main rival seem more compelling than those in favor of a takeover. IBM Global Services made a pre-tax profit of $4.49bn in full-year 2003, whereas EDS made a comparable loss of $123m.
Analysts also suggest that antitrust issues could also block an outright takeover of EDS by its larger rival. IBM Global Services made revenue of $42.6 bn in 2003, making it almost twice the size of EDS with sales of $21.5bn. But their combined 2003 sales of $64.1bn would give it a share of 11.5 per cent of the market - some way short from the 50 per cent level that typically constitutes a monopoly position.
The most likely part of EDS for disposal is its product lifecycle management (PLM) software unit, about which it announced it was in discussions with potential buyers earlier this year. Although IBM is a prominent player in the PLM sector already through its partnership with French software vendor Dassault Systemes, it would be strange for it to buy the EDS unit and in doing so, hand over some much-needed cash to its closest rival.