A Tale of Two Turnarounds at EDS: The Jordan Rules

Abstract

The case briefly describes the history of Electronic Data Systems (EDS) under Ross Perot and GM before turning to the beginning of a tumultuous decade in the late 1990s. As the turn of the century approached, EDS made critical strategic missteps such as missing opportunities in the Internet space, overlooking the onset of client-server computing, and failing to obtain major Y2K-related projects. The company attempted a turnaround by replacing the CEO with Dick Brown, whose leadership helped streamline the sprawling company. Despite initial successes, Brown's tenure ultimately ended in failure, due largely to his failure to recognize the growing Indian market and his willingness to buy business at the expense of the company's margin. The disastrous multibillion-dollar Navy & Marine Corp Intranet contract typified the type of high-profile transactions that Brown pursued, often boosting EDS's stock price in the short term while eroding its cash flow short term and its profitability over the long term. EDS management went through several stages of the turnaround process: the blinded phase, the inactive phase, and the faulty action phase, until Michael Jordan replaced Brown as CEO and enacted a three-tiered operational, strategic, and financial turnaround.

This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2023 Sage Publications, Inc. All Rights Reserved

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Resources

Exhibit 1: The Rise of the $1 Billion+ Mega-Deal in IT Outsourcing

Year

Vendor

Client

Estimated Value ($ in millions)

Term (years)

1998

IBM Global Services

General Electric

1,500

10

1998

EDS

Banca di Roma

1,500

10

1997

The Sabre Group

US Airways

4,300

25

1997

IBM Global Services

Telstra

3,500

N/A

1997

EDS

Bell South

3,000

10

1997

Ernst & Young

Shell International

3,000

5

1997

CSC/BDM

GSA

3,000

5

1997

EDS

Commonwealth Bank of Australia

2,900

10

1997

Lucent

Navy

2,900

10

1997

Ernst & Young

Farmland Industries

2,100

15

1997

Andersen Consulting and IBM

Ryder Systems

1,400

10

1997

Lockheed Martin

Federal Aviation Administration

1,044

10

1997

IBM Global Services

Monsanto

1,000

10

1996

IBM Global Services

Lucent

6,200

10

1996

CSC and Andersen Consulting

DuPont

4,000

10

1996

CSC, BDM, EDS

DEIS II

3,000

5

1996

Andersen Consulting, ATT, and CSC

JP Morgan & Co.

2,000

7

1996

CSC

CNA Financial Corporation

2,000

10

1996

IBM Global Services

Ameritech

2,000

10

1996

AT&T Solutions

Textron Inc.

1,100

10

1996

Logicon

National Insititute of Health

1,000

5

1995

Perot Systems

Swiss Bank

6,250

25

1995

EDS

BTI Americas, Inc.

1,000

11

1995

EDS

Dutch Railway

1,000

10

1995

EDS

UK Dept of SS

1,000

10

1994

EDS

Xerox

3,200

10

1994

AT&T Solutions

Delta Air Lines

2,800

10

1994

CSC

British Aerospace

1,500

10

1994

CSC

Hughes Aircraft Co.

1,500

8

1994

CSC

NASA

1,045

8

1994

MCI Systemhouse

Canada Post

1,000

10

1993

EDS

INLAND Revenue

1,500

10

1993

EDS

K.F. Sweden

1,000

10

1993

France Telecom

Euro Disneyland

1,000

10

1992

IBM Global Services

McDonnell Douglas

3,000

10

1991

CSC

General Dynamics

3,000

10

1991

EDS

System One/Continental

2,100

10

Source: Salomon Smith Barney Research Note, June 16, 1998.

Exhibit 2: EDS Income Statement

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

Net Sales or Revenues

22,134

21,268

19,757

20,669

21,476

21,502

21,543

19,227

18,534

16,891

15,236

14,441

12,422

9,960

8,507

Operating Expenses

20,846

20,437

19,103

20,009

20,845

19,633

19,318

17,406

17,023

15,776

13,692

13,360

10,893

8,717

7,396

Cost of Goods Sold

17,495

17,242

15,828

16,686

16,414

16,301

15,956

14,199

13,735

12,545

10,956

10,776

8,494

6,788

5,769

Selling, General & Admin Expenses

1,910

1,858

1,819

1,647

1,902

1,889

1,880

1,776

1,853

1,838

1,528

1,403

1,292

1,187

1,005

Depreciation, Depletion & Amortization

1,441

1,337

1,456

1,676

2,529

1,443

1,482

1,431

1,436

1,394

1,209

1,181

1,108

741

621

Depreciation

784

761

831

1,058

1,044

990

948

815

892

906

876

874

808

578

466

Amortization of Intangibles

462

401

450

618

1,485

453

534

616

544

488

332

307

300

164

156

Amortization of Deferred Charges

195

175

175

0

0

0

0

0

0

0

0

0

0

0

0

Operating Income

1,288

831

654

660

631

1,869

2,096

1,821

1,511

1,115

1,543

1,082

1,529

1,244

1,111

Extraordinary Credit - Pretax

0

0

0

5

0

0

315

0

0

119

0

0

0

0

0

Extraordinary Charge - Pretax

156

0

241

909

754

0

144

148

1,068

48

330

331

0

0

0

Non-Operating Interest Income

182

162

214

104

0

0

35

94

335

80

104

77

59

92

55

Interest Expense On Debt

225

239

241

321

301

258

247

210

150

131

176

153

121

53

40

Other Income/Expense - Net

0

2

53

73

35

86

144

243

29

0

0

0

0

0

0

Pretax Income

1,089

756

439

388

389

1,525

2,199

1,800

658

1,134

1,142

674

1,467

1,284

1,131

Income Taxes

360

257

153

93

137

518

812

657

237

390

411

243

528

462

407

Current Domestic Income Tax

145

113

140

373

59

88

153

466

478

450

276

346

346

312

147

Current Foreign Income Tax

114

226

87

156

106

360

182

168

249

122

60

69

117

168

78

Deferred Domestic Income Tax

37

125

262

26

421

416

437

8

323

191

63

95

45

16

161

Deferred Foreign Income Tax

64

43

188

98

331

170

40

15

168

10

12

77

21

33

21

Net Income Before Extra Items/Preferred Div

729

499

286

295

252

1,007

1,387

1,143

421

743

731

432

939

822

724

Extr Items & Gain(Loss) Sale of Assets

13

29

422

748

1,446

109

24

0

0

0

0

0

0

0

0

Net Income Before Preferred Dividends

716

470

436

453

1,698

1,116

1,363

1,143

421

743

731

432

939

822

724

Net Income to Common Shareholders

729

499

0

0

252

1,007

1,387

1,143

421

743

731

432

939

822

724

EPS Including Extraordinary Items

$1.35

$0.89

$0.28

$0.32

$3.55

$2.28

$2.81

$2.40

$0.85

$1.50

$1.48

$0.89

$0.00

$1.71

$1.51

EPS From Continuing Operations

$1.37

$0.94

$0.54

$0.59

$0.53

$2.06

$2.86

$2.40

$0.85

$1.50

$1.48

$0.89

$1.96

$1.71

$1.51

Dividend Per Share

$0.20

$0.20

$0.20

$0.40

$0.60

$0.60

$0.60

$0.60

$0.60

$0.60

$0.60

$0.60

$0.52

$0.48

$0.40

Common Shares Used to Calculate Diluted EPS (millions)

542.0

529.0

526.0

501.0

479.0

489.0

484.0

476.4

498.0

495.5

493.9

487.2

483.7

481.7

480.9

Source: Thomson ONE access to EDS 10-K filings.

Exhibit 3: EDS Balance Sheet

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

Assets

Cash & ST Investments

3,194

3,017

3,220

3,555

2,313

1,890

839

693

729

1,312

1,025

963

639

758

608

Cash

3,139

2,972

1,899

2,102

2,197

1,642

521

393

537

1,039

677

880

549

608

383

Short Term Investments

55

45

1,321

1,453

116

248

318

300

192

273

348

83

90

150

224

Receivables (Net)

3,603

3,647

3,311

3,161

3,101

6,435

5,642

4,837

4,423

3,835

3,737

3,513

3,169

2,148

1,525

Inventories

0

0

0

0

0

0

0

0

0

37

101

142

181

138

131

Other Current Assets

1,648

1,593

1,971

1,955

2,790

1,060

893

637

726

450

307

391

393

311

244

Total Current Assets

8,445

8,257

8,502

8,671

8,204

9,385

7,374

6,167

5,878

5,633

5,169

5,008

4,382

3,354

2,507

Long Term Receivables

73

47

49

51

70

0

0

0

0

0

0

34

90

158

118

Investment In Unconsolidated Subsidiaries

51

72

113

149

166

8

311

227

523

627

472

652

603

357

250

Other Investments

151

142

182

411

253

355

112

354

363

475

644

784

728

714

716

Property Plant & Equipment – Net

2,489

2,179

1,967

2,181

2,818

3,023

3,082

2,474

2,460

2,314

3,141

3,395

3,602

3,171

2,532

Property Plant & Equipment - Gross

7,198

6,564

6,729

7,288

8,320

8,068

7,667

6,790

6,706

7,871

7,905

8,000

7,528

6,314

5,312

Land

60

89

86

118

116

117

115

131

139

136

136

135

137

125

122

Buildings

1,759

1,460

1,599

1,792

1,991

1,854

1,627

1,260

1,232

1,147

1,063

1,007

925

879

815

Machinery & Equipment

0

0

0

0

0

5,460

5,298

4,846

4,775

4,976

4,980

5,202

4,836

3,968

3,159

PP&E - Other

449

429

424

440

600

637

627

553

560

1,612

1,727

1,657

1,630

1,342

1,217

(Less) Accumulated Depreciation

4,709

4,385

4,762

5,107

5,502

5,045

4,585

4,315

4,246

5,556

4,764

4,605

3,926

3,143

2,780

Other Assets

7,829

6,296

5,450

5,415

6,135

6,109

5,474

3,479

3,299

2,477

1,748

1,319

1,395

978

757

Deferred Charges

1,549

899

710

767

1,190

318

234

210

338

475

329

0

0

0

0

Tangible Other Assets

259

283

268

389

242

305

254

237

260

141

144

210

225

122

108

Intangible Other Assets

6,021

5,114

4,472

4,259

4,703

5,486

4,986

3,031

2,701

1,861

1,275

1,109

1,170

856

649

Total Assets

19,038

16,993

16,263

16,878

17,646

18,880

16,353

12,700

12,522

11,526

11,174

11,193

10,799

8,732

6,880

Liabilities

Accounts Payable

605

677

492

472

572

710

462

407

378

330

372

466

604

571

360

ST Debt & Current Portion of LT Debt

168

127

314

658

2,275

1,239

36

13

494

48

110

133

248

203

173

Accrued Payroll

851

815

694

565

800

622

1,318

1,139

1,081

850

662

313

291

196

287

Income Taxes Payable

54

72

208

58

50

386

220

112

93

175

138

128

76

111

202

Other Current Liabilities

3,238

3,543

3,340

3,536

3,873

3,172

2,331

2,648

2,950

2,255

1,976

2,123

2,042

1,791

1,139

Total Current Liabilities

4,916

5,234

5,048

5,289

7,570

6,129

4,367

4,318

4,996

3,657

3,258

3,163

3,261

2,873

2,160

Long Term Debt

3,209

2,965

2,939

3,168

3,488

4,148

4,692

2,586

2,216

1,184

1,791

2,324

1,853

1,021

523

LT Debt Excl Capital Leases

3,209

2,965

2,939

3,168

3,488

4,148

4,692

2,586

2,216

1,184

1,791

2,324

1,853

1,021

523

Non-Convertible Debt

2,519

2,275

2,249

2,478

2,798

1,773

3,910

2,586

2,216

1,184

1,791

2,324

1,853

1,021

523

Convertible Debt

690

690

690

690

690

2,375

782

0

0

0

0

0

0

0

0

Provision for Risks & Charges

989

1,404

1,173

1,132

1,116

1,113

0

0

0

0

0

0

0

0

0

Deferred Taxes

186

961

0

866

970

51

204

129

268

363

475

429

740

660

642

Other Liabilities

245

305

487

531

562

285

0

0

0

0

0

0

0

0

0

Total Liabilities

9,173

8,947

8,673

9,254

11,766

11,726

9,263

7,033

7,480

5,204

5,523

5,917

5,854

4,554

3,325

Shareholders' Equity

Minority Interest

174

150

78

184

166

132

644

354

333

227

166

53

0

0

0

Preferred Stock

0

0

0

0

0

0

0

175

175

179

175

440

0

0

0

Common Equity

9,691

7,896

7,512

7,440

5,714

7,022

6,446

5,139

4,535

5,917

5,309

4,783

4,945

4,178

3,555

Common Stock

5

5

5

5

5

5

5

5

5

5

5

5

518

455

421

Capital Surplus

3,097

2,973

2,682

2,433

917

901

962

949

972

958

856

683

0

0

0

Other Appropriated Reserves

158

684

552

538

359

454

560

238

80

0

0

0

0

0

0

Retained Earnings

6,158

5,630

5,371

5,492

5,812

7,951

7,122

6,042

5,179

5,050

4,602

4,201

4,561

3,873

3,282

Unrealized Foreign Exchange Gain(Loss)

912

502

189

482

226

240

0

0

0

96

153

98

96

89

86

(Less) Treasury Stock

639

530

179

431

889

1,146

1,083

1,619

1,542

0

0

7

33

55

62

Total Shareholders' Equity

9,691

7,896

7,512

7,440

5,714

7,022

6,446

5,314

4,710

6,096

5,484

5,223

4,945

4,178

3,555

Total Liabilities & Shareholders' Equity

19,038

16,993

16,263

16,878

17,646

18,880

16,353

12,700

12,522

11,526

11,174

11,193

10,799

8,732

6,880

Common Shares Outstanding (millions)

509.9

508.5

523.3

515.3

480.6

476.9

477.3

465.3

466.2

493.1

491.6

487.2

483.7

481.7

480.9

Source: Thomson ONE access to EDS 10-K filings.

Exhibit 4: EDS Cash Flow Statement

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

Operations

Net Income

729

499

286

0

0

1,007

1,387

1,143

421

743

731

432

939

822

724

Depreciation, Depletion & Amortization

1,441

1,337

1,456

0

2,529

1,443

1,482

1,431

1,436

1,394

1,209

1,181

1,108

741

621

Depreciation & Depletion

784

761

831

0

0

990

948

815

892

906

876

874

808

578

466

Amortization of Intangible Assets

657

576

625

0

1,485

453

534

616

544

488

332

307

300

164

156

Deferred Income Taxes & Investment Tax Credit

0

0

0

0

0

0

0

0

0

0

0

0

0

22

50

Other Cash Flow

224

214

260

0

(37)

142

(175)

(44)

20

31

391

632

92

31

0

Funds From Operations

2,394

2,050

2,002

1,853

2,226

2,592

2,694

2,530

1,876

2,168

2,331

2,244

2,139

1,616

1,395

Funds From/For Other Operating Activities

(353)

(117)

(706)

(535)

(840)

(346)

(972)

(972)

186

(81)

(140)

(693)

(880)

(125)

(0)

Decrease/(Increase) In Receivables

327

51

(310)

-

440

(679)

(882)

(411)

21

(129)

(210)

(374)

(839)

(534)

(256)

Decrease/(Increase) In Inventories

0

0

0

-

-

0

0

0

-

-

48

(8)

(42)

(2)

(16)

Increase/(Decrease) In Accounts Payable

(95)

312

(207)

-

31

56

(481)

(305)

368

181

263

274

(76)

483

22

Increase/(Decrease) In Income Taxes Payable

206

(234)

(347)

-

(475)

283

-

(38)

(276)

(111)

33

(250)

56

(94)

139

Decrease/(Increase) In Other Assets/Liabilities

(791)

(246)

158

-

(836)

(6)

391

(218)

73

(22)

(275)

(334)

21

22

110

Net Cash Flow – Operating Activities

2,041

1,933

1,296

1,318

1,386

2,246

1,722

1,559

2,062

2,088

2,190

1,552

1,259

1,491

1,395

Investing

Capital Expenditures (Addition to Fixed Assets)

(725)

(729)

(718)

(666)

(703)

(973)

(1,285)

(768)

(685)

(980)

(902)

(1,266)

(1,354)

(1,218)

(918)

Additions To Other Assets

(378)

(427)

(300)

(302)

(494)

(367)

(294)

(601)

(114)

0

0

0

0

0

0

Net Assets From Acquisitions

(461)

(361)

(552)

(78)

(11)

(107)

(2,089)

(202)

(1,722)

(108)

(180)

(47)

(235)

(187)

(122)

Increase In Investments

(4)

(1,608)

(1,338)

(3,078)

(1,111)

(195)

(259)

(142)

(270)

(561)

(635)

(324)

(457)

(770)

(605)

Decrease In Investments

120

3,008

1,904

3,298

1,348

277

295

320

690

406

346

264

251

689

596

Disposal of Fixed Assets

28

49

178

0

224

301

26

0

0

0

0

0

0

0

0

Other Use/(Source) – Investing

(34)

(35)

(29)

(28)

(25)

(67)

(18)

(145)

(227)

(466)

(123)

(102)

(13)

0

0

Net Cash Flow – Investing

(1,386)

(33)

(797)

(798)

(700)

(997)

(3,588)

(1,247)

(1,874)

(779)

(1,248)

(1,271)

(1,782)

(1,486)

(1,050)

Financing

Net Proceeds From Sale/Issue of Com & Pref

155

285

107

274

47

89

417

97

162

104

630

490

26

34

55

Com/Pfd Purchased

(391)

(667)

(0)

(0)

(0)

(380)

(0)

(332)

(1,836)

(93)

(688)

(0)

(0)

(0)

(0)

Long Term Borrowings

13

0

5

6

1,869

461

3,211

44,511

30,366

7,255

8,377

11,239

7,467

690

92

Reduction In Long Term Debt

(192)

(357)

(709)

(728)

(1,432)

(171)

(425)

(44,350)

(28,956)

(7,912)

(9,155)

(10,871)

(6,776)

(197)

(221)

Increase/(Decrease) In Short Term Borrowings

0

0

0

0

(235)

147

(700)

0

0

0

0

0

0

(103)

(99)

Cash Dividends Paid 0 Total

(102)

(104)

(105)

(200)

(287)

(287)

(283)

(280)

(291)

(295)

(294)

(291)

(251)

(231)

(192)

Other Source (Use) – Financing

13

9

21

(15)

(33)

(25)

(156)

2

0

0

0

(500)

0

1

(5)

Net Cash Flow – Financing

(504)

(834)

(681)

(663)

(71)

(166)

2,064

(352)

(554)

(941)

(1,130)

66

465

194

(370)

Effect of Exchange Rate On Cash

16

7

21

48

60

38

70

73

135

6

15

16

2

26

14

Increase/(Decrease) In Cash & Short Term Investments

167

1,073

203

95

555

1,121

128

114

502

361

203

331

59

225

39

Note: EDS restated its 2003 and 2004 net income figures due to miscalculations arising from the NMCI contract, executive bonus payments, and improperly recognized revenue.

Source: Thomson ONE access to EDS 10-K filings.

Exhibit 5: EDS Stock Price Performance

Figure

Exhibit 6: GM Contract's Drag on Revenue Growth

Year

Estimated Base Rev. Growth (%)

Estimated GM Rev. Growth a (%)

GM Drag on Base Growth b (%)

1998

20

–11

–8.8

1999

17

–7

–5.4

2000

15

–7

–4.2

2001

15

–3

–2.8

2002

15

–2

–2.3

2003

15

–2

–2.0

2004

15

–2

–1.8

2005

15

–1

–1.5

a. Assumes master service agreement revenues do not grow and EDS loses all revenues bid out under the MSA and that revenues are lost mid-year, on average.

b. Difference between base growth and total growth.

Source: Salomon Smith Barney Research Note, June 16, 1998.

Exhibit 7: EDS's Lagging BPO Penetration—Revenue by Service Category, 1997

Source: Salomon Smith Barney Research Note, June 16, 1998.

Figure

Exhibit 8: Stock Price Performance under Dick Brown with Mega-Deal Announcements

Source: Yahoo Finance.

Figure

Exhibit 9: EDS Divestitures under Jordan

Asset Sold

Year Closed

Amount ($ in millions)

UGS PLM Solutions

2004

2,005

Consumer Network Services

2004

323

Credit Union Industry Group

2004

218

Automotive Retail Group

2004

85

US Wireless Clearing Business

2004

58

Technology Solutions/Subscription Fulfillment

2004

6

Soft Solutions

2004

1

European Wireless Clearing Business

2005

93

A.T. Kearney

2006

52

Total (all cash)

2,841

Source: EDS 10-K, 2006.

Exhibit 10: Rebound in New Contract Signings under Jordan ($ in billions)

Source: CSFB Equity Research Note, September 17, 2005.

Figure

Exhibit 11: EDS Company Timeline

Figure

This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2023 Sage Publications, Inc. All Rights Reserved

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