Second SEC Probe Adds To EDS TroublesMay 15, 2003 | FT.com
Electronic Data Systems, the beleaguered IT outsourcing giant, on Thursday revealed a second probe by the Securities and Exchange Commission into its business activities.
In a regulatory filing, EDS said the SEC had asked for information related to its troubled IT outsourcing contract with the US Navy.
This is its largest contract, valued at nearly $7bn. But instead of being a trophy win, the contract has drained hundreds of millions of dollars and has yet to produce revenue or profits.
EDS said that it was "responding to a subpoena and providing documents and information to the SEC".
Last year, the SEC launched a probe of EDS hedging activities around its stock that led to large losses. This was directly related to a plunge in its share price in September, when it warned of sharply lower profits and revenue due, in part, to the problems with the Navy contract.
Since that time, EDS has struggled to recover its momentum. It lost several large IT outsourcing deals to its largest competitor, International Business Machines. And it has replaced its most senior management, bringing in Michael Jordan as chief executive and chairman, Jeffrey Heller as president and chief operating officer and Robert Swan as chief financial officer.
EDS says the Navy contract might start producing revenues by the end of this year but will not be profitable until next year. This is because the contract became mired in political issues that have led to substantial delays.
The company has also had similar problems with a large government contract in the UK, where revenue has also been delayed.
Mr Jordan has promised to improve the company's business strategy and to steer it away from its previous focus on large "mega deals" where the profit margins can be thin. He said recently that EDS would still compete for mega deals but be much more selective.
The company is also facing increased competition in IT outsourcing from Hewlett-Packard. HP recently said it had won two multi-billion dollar deals for which IBM and EDS had competed.