This Splice Could Be Golden

A dating service couldn't make a better match. Electronic Data Systems Corp., the giant computer services company, wants to expand overseas, but its parent corporation is strapped for cash. It also lacks the communications links it needs to be truly global. British Telecommunications PLC is assembling a worldwide network and has contracts with multinationals in the world's fastest-growing markets but needs a computer services partner to be state-of-the-art. And it's rolling in cash.

Now, after a courtship that began just a few months ago, EDS and BT are talking about tying the knot. And what a union it would be. There are potential benefits all around: General Motors Corp., owner of EDS, gets some much-needed cash. EDS gets a foothold overseas, where it has had a tough time breaking in. And BT gets to broaden its services outside the telephone business. "You're talking about creating a pretty powerful business in Europe," says Peter A. Cunningham, president of Input, a Mountain View (Calif.) market research firm.

Sources close to both companies say talks are under way, although the shape of the deal remains very loose. One source says the first idea was a joint venture company. It would house BT's Customer Systems unit, now Britain's third-largest supplier of computer services, plus Atlanta-based subsidiary Syncordia Corp., a communications network management company BT launched in 1991 that has been slow to take off. Late last year, when GM's crisis peaked, the parties began talking about BT taking an equity stake, with GM selling as much as a $5 billion share, or about 25%, of EDS. But those discussions are "very preliminary," adds the source.

NEW WAVE? A union of the two would square with the industry trend and could even set off a wave of mergers. Telephone companies and computer services companies more and more are being driven into each other's arms by the needs of corporate clients that rely increasingly on intense use of the telephone and the computer together. In Europe, France Telecom has been eyeing an equity stake in Cap Gemini Sogeti, Europe's largest computer services company. American Telephone & Telegraph Co. is on the move in Europe, using a small computer services unit it bought from automobile maker Rover Group in 1989 as a vehicle for expanding sys-tems integrators in Britain, France, andGermany.

But the deal BT and EDS are hatching could be the most ambitious of all. BT Chairman Iain Vallance wants to make his company the world's largest carrier of voice, data, and video signals for large corporations. It plans to spend $1 billion to build a futuristic network that will circle the globe, bypassing existing telephone companies with giant switching centers in London, New York, Frankfurt, Sydney, and other cities.

Meanwhile, EDS's talent is in writing applications software and integrating computers for corporate clients. The Dallas-based company, perhaps best known as the brainchild of onetime Presidential candidate Ross Perot, can also manage a client's entire data processing operation. But in Europe, where EDS wants to increase its $1.1 billion business, the Texas company is still sometimes seen as an "ugly American," says Input's Cunningham, and it needs a strong European partner to put the image to rest.

'JUST TROUBLE.' Even if their ambitions overlap, EDS and BT are very different and could have trouble melding their corporate cultures. BT was privatized in 1984, but it still holds 93% of the British market and isn't accustomed to competing. Some of the company's forays into North America have fizzled out, most recently when it sold a 20% stake in McCaw Cellular Communications Inc. to AT&T for $1.8 billion.

EDS, on the other hand, is a highly entrepreneurial company. "It will be an enormous challenge for BT to absorb a company with a true commercial background," says Keith Mallinson, research director at Yankee Group Europe. Others aren't so sure BT should link up with EDS at all. Says a London consultant who often advises BT: "It's a big mistake. EDS knows nothing about telephones. It's just trouble."

There are other problem areas as well. General Motors owns 40% of the GM Class E shares, which are tied to the performance of EDS but are not equity stakes per se. If BT bought Class E shares, technically it wouldn't be getting a stake in EDS, but in GM. For BT to influence EDS management, then, analysts suggest BT would have to buy EDS outright. GM, however, has seen EDS grow rapidly since 1984, when revenues were less than $1 billion, to more than $8 billion last year, when profits jumped an estimated 18%. GM considers EDS one of its crown jewels and may be reluctant to part with all of it. But objections could soon fade, with so much to be gained by all sides.

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