GM Eds

NEW YORK UNIVERSITY LEONARD N.
STERN SCHOOL OF BUSINESS
General Motors and EDS
Richard D. Freedman
New York University

Leonard N. Stern School of Business
Revised April 1998
It’s hard to imagine a more bizarre match than General Motors, the slow
bureaucratized giant, and EDS, the scrappy band of Perot loyalists.1
— Maryann Keller, Automotive Analyst
The GM-EDS Merger
In the early 1980s, Roger Smith, chairman of General Motors, saw technology as the means to
improve his organization’s performance. In his vision, new factories stocked with robots and
coordinated by high-tech computer systems would lead GM into the 21st century. Technology
would be the answer to GM’s woes in coordinating operations across divisions and departments
that spanned the mammoth organization. Transactions between dealers and the different car
divisions would be performed seamlessly through a coordinated data processing function,
eliminating cumbersome paperwork. Technology would also help GM rein in a burgeoning
bureaucracy that slowed the development of new products.2
In 1983, GM’s investment bankers suggested that Electronic Data Systems (EDS) was one of
several business systems companies that both fit GM’s desire for technology-oriented companies
and could be acquired for the right price. Though relatively small, EDS was a major player in
data processing services. It competed with, and often beat, IBM in securing contracts to provide
data processing services to major computer users, such as state Medicaid programs.
On June 28, 1984, Ross Perot sold EDS to GM for $2.55 billion, the largest acquisition ever
made by GM. Several days later, Perot was elected to GM’s board of directors.3
I. Reasons for the Merger - What Drove Each Side to Merge
GM was in the midst of a crisis in the early 1980s. The automaker was losing market share, the
quality of its products was considered inferior to imports, and labor costs per car were higher
than those of competitors. General Motors had not been involved in a merger in over half a
century, but its current problems made the company willing to listen to the suggestions of
investment bankers. With his goal of rebuilding GM and positioning it for the 21st century,
Smith considered a merger or acquisition as a possible way to quickly acquire advanced
technological capabilities.4
With EDS, GM saw the opportunity to standardize the data processing transactions between
dealers and car divisions. GM’s dealers were being buried under mountains of paperwork. Smith
also saw the possibility of developing an entirely new interface between dealers and the Saturn
car division. Customers would be able to order their cars from terminals in showrooms, as well
as arrange financing from GMAC (GM’s financial division).5
Despite GM’s vast data processing resources, the systems were in disarray. According to Keller,
“previous attempts to computerize had led to the purchase of more than 100 mainframes, but
there was no centralized system to link the computer operations. Each group or division had its
own hardware and software, so, for example, a design group could not interact with production
engineers via computer; data were transmitted by paper and reentered into the noncompatible
computer.” In addition to costing GM an estimated $600 million a year, the lack of a centralized
data processing function within the company made it impossible to coordinate operations
between departments. “The company desperately needed an integration of its data processing
functions.” It was hoped that EDS would overcome these problems.6
GM also wanted to take advantage of EDS’s expertise in health care claims processing. Smith
believed that EDS would be able to control GM’s $2.3 billion health care bill, in part by
rationalizing the system, which used 187 different carriers.7
Finally, Smith hoped to transfer the aggressive EDS culture to GM. “He took 13,800 EDS people
and merged them with a culture of 800,000 and fully expected the smaller culture to pervade
GM.”8 He believed that Perot and EDS would “unfreeze GM’s organizational inertia.”9
While GM would become EDS’s largest customer by way of the merger, it was expected that
EDS would continue to service and develop other customers.
In addition to the numerous opportunities associated with GM’s acquisition of EDS, there were
also potential problems. It was not clear how EDS could help GM with its automation efforts.
Given enough time and money, robots could be equipped with vision and programmed to
perform even the most minor assembly operations. Realistically, however, hundreds of problems
occur on an assembly line on a daily basis, from wrong sized bolts to software glitches. While a
temporary computer problem may not be a major issue in an insurance office, it can shut down
an assembly line for days, resulting in lost production. Adding to the problem was that GM line
workers were trained only to do their jobs, not to improvise solutions.”10
Still, automation was a cornerstone of Roger Smith’s plans for the GM of the future. Smith
hoped that automation of factory floor operations would solve two problems at once: quality
problems and labor costs. Robots could be programmed precisely to do a given task over and
over, without breaks and all of the other problems associated with human labor (e.g.,
absenteeism and health care costs).
Upon hearing about GM’s interest in EDS, Ross Perot was surprised, but said, “when a company
the size of GM approaches, you have to consider it. We were flattered they came to us. In fact,
I’m surprised they ever heard of us.”11
2
Perot had few reasons to sell his company. At 53, he was a multimillionaire, and EDS was
growing at 20% a year. He had tired of running the day-to-day details of EDS and had turned the
company’s presidency over to Mort Meyerson. Perot only intervened to help sell a particularly
important client.12 Perot personally stood to make a tremendous profit on the deal with GM. GM
would pay cash for his EDS shares at a premium over the market price, resulting in a windfall
profit. For his 45% share of EDS, Perot would be paid more than $930 million in cash and 5.5
million GM Class E shares, with a guaranteed worth of nearly $700 million in seven years.13
More than anything else, Perot saw the sale of EDS to GM as his opportunity to make his
company a worldwide force. Coupling EDS with the world’s largest corporation would instantly
make him and EDS major league players.14 Perot envisioned a day when EDS would be the
number-two computer company in the world, second only to IBM. This could come about by the
merger of EDS with GM’s data processing and communication capabilities. Along the same
lines, EDS could become the major supplier of computer services to a number of industries.15
Perot had many concerns about a possible GM/EDS deal. Initially, he could not imagine EDS as
a subsidiary of GM. What was the “fit” between EDS and the world’s largest automobile
manufacturer? However, Perot imagined the profits EDS could realize with GM as a customer.
EDS’s profits had grown consistently by 20% a year. This rate became difficult to sustain as
EDS grew larger.16
The question of how EDS could continue its 20% annual growth was raised at a corporate
retreat. Mort Meyerson knew that new contracts worth $10 million were no longer enough. They
had to go after $100 million contracts. EDS’s salespeople had been courting some of America’s
largest companies, those in the Fortune 100. The biggest names such as ITT, Bank of America
and AT&T were all possible clients. Mort Meyerson considered any huge company a possible
client. “There’s only one I can think of that’s probably too big for us,” he said. “General
Motors.”17
II. The Merger Agreement
Perot realized that it would be disastrous for EDS to lose its unique culture due to its acquisition
by GM. The culture that had been developed at EDS was an important motivating factor for its
employees. In negotiating the deal, Perot sought to keep EDS independent. Smith agreed, hoping
that EDS’s culture would inspire GM workers.18
GM agreed to several provisions to keep EDS independent and thus make the merger work.
Among them was an agreement to keep EDS as a separate profit center and to allow EDS to
continue its performance-based compensation system. Since EDS relied heavily on stock and
stock option incentives, GM authorized a separate stock issue for EDS. It would be listed on the
New York Stock exchange as GME, and its price would depend upon the performance of the
EDS subsidiary within GM.19 Perot knew that his managers would not be happy with GM stock
as part of their incentive plan since it had been performing poorly and had not had significant
appreciations in price in decades.20
3
III. The Companies
General Motors
General Motors grew from its founding to become the world’s largest automaker, holding 46%
of the American market by 1980.21 GM’s success eventually bred complacency. Having reached
the status of the world’s leading automaker, a new theme was woven into GM’s corporate
philosophy: “General Motors could do no wrong.”22 The smugness of GM’s management would
blind it to a changing environment and leave it ill-prepared to cope with new demands in the
market.
In the 1960s, the automotive environment was changing. Federal auto safety regulations were
introduced. Lawsuits brought against GM and its Corvair model by consumer activist Ralph
Nader helped spur the government into action on auto safety. Additionally, foreign competition
was making its way onto American shores, including Germany’s Volkswagen with its popular
Bug. Japan’s Honda, selling only 1,300 automobiles in 1970, would sell 100,000 cars by 1975.
GM’s management dismissed much of its foreign competition as a fad. Finally, the oil shocks of
the 1970s brought further changes to the automotive environment as consumers began favoring
small cars.23
By the start of Smith’s tenure as chairman, nowhere in GM would freethinking, opinionated

individuals prosper. Even if true, bad news was not acceptable. This was fact, not only at the
level of chairman but at all levels throughout the organization. The path up through the
organization was only open to “yes” men.24
Reward System at GM
Noted auto industry analyst Maryann Keller criticized General Motor’s “contemptuous
paternalism.” That is, GM treated its employees as though they were members of an extended
family. The company was nicknamed Generous Motors and Mother Motors because of the job
security, generous pay, and benefits. As long as an employees played the game and didn’t rock
the boat, they were certain to serve a long tenure at GM and retire with a generous pension.
Within GM, compensation was linked to seniority. An employee’s tenure was the primary
criterion for promotions and salary increases.25
Within the auto industry, most hourly workers are represented by the United Auto Workers
(UAW) union. Over the years, whenever the UAW negotiated a new contract with one
automaker, the other automakers would automatically grant its workers comparable pay raises,
insurance, holidays, vacations, and other benefits. “This policy [which is no longer practiced]
helped create a work force whose compensation was not directly linked to their performance or
to the company’s bottom line.”26
Alfred Sloan, chairman of GM in the 1930s, established an employee bonus plan, saying, “The
interests of the corporation and its stockholders are best served by making key employees
partners in the company’s prosperity.” The plan changed between the 1930s and the 1980s.
4
Despite GM’s growth over half a century, the number of participants in the plan fell from around
16,000 to around 4,000, all of who were top managers in the company.27
The change in the employee bonus plan resulted in an elitist culture. Fast track GM managers
moved up the corporate ladder, not by doing what was best for the company, but by looking out
for their own interests. To keep their bonuses, GM executives were not likely to challenge
conventional corporate wisdom.28
GM’s reward system included automatic cost-of-living allowances (COLAs), which were added
yearly to employees’ base pay. This resulted in high labor costs. When EDS’s Mike Riedlinger
took over GM’s data-processing operations, he found that “because of all those automatic pay
raises over the years, they had people who were horribly overpaid. They had people who did
three hours’ worth of work in eight hours on the job.”29
Roger Smith
As chairman of GM, Roger Smith was one of the most powerful heads of business in the world.
Smith ascended to the chairmanship in 1981 after 31 years of climbing GM’s corporate ladder.
Smith started his career as an accountant in 1949 at age 24.30 He dove into his work and quickly
developed a reputation as an industrious worker. No matter what the job, Smith attacked with the
same ferocity. Smith toiled longer hours than were expected of him, and his efforts were noticed.
GM’s growth and market share attracted the attention of the U.S. government. Many in
Washington believed that GM was beginning to monopolize the automotive market and should
be broken up in order to keep the industry competitive. Tom Murphey, a GM analyst 10 years
senior to Smith, was preparing facts and figures for GM’s defense for antitrust hearings in
Washington. He summoned Smith to help him prepare the defense. The men showed the senators
GM’s impact on the nation’s economy and convinced them that it was in the nation’s best
interests to keep GM whole.31
Roger Smith followed Tom Murphey up through GM’s ranks. When Murphey became chairman
of GM in 1974, Smith became executive vice president of finance and a director. In January
1981, Roger Smith became the handpicked successor to Thomas Murphey.32
To prevail in discussion or debate, Smith was forced to rely on substance, not style. He wasn’t
blessed with the physical presence, oratorical skills, or smooth charm of some of his peers. His
voice was too high pitched and nasal. He was short and unprepossessing, and his skin became
blotched and mottled when he was tense.33
To put it mildly, Roger Smith was no Lee Iacocca. Flamboyance of any kind seemed anathema
to him.34
At first glance, Smith seemed to be an executive who would welcome open exchanges of ideas.
In truth, Smith did not like being challenged. “His idea of team play was that executives support
his plan without questioning it.”35
5
In his tenure as chairman, Smith changed GM probably more than any other chairman since
Alfred Sloan. It was Sloan who created a decentralized management system that helped propel
GM to its position as the nation’s largest automaker in the 1930s. Smith changed GM through
the acquisitions of EDS, and later Hughes Aircraft, as well as the consolidation of its five car
divisions into two, one concentrating on large cars and the other on small cars.36
EDS
After leaving the Navy in 1956, Ross Perot joined IBM as a salesman. The computer hardware
manufacturer of the day, known for its strong culture, IBM was an ideal place for Perot. Perot
found the blue suits and white shirts, the code of behavior, and long hours an easy and appealing
transition from the Navy.37
While working at IBM, Perot noticed that many clients were buying more computing power than
they needed and did not have knowledge of how to efficiently use this power. Perot suggested
creating a division that would help customers make better use of computer power purchased
from IBM, but the suggestion fell on deaf ears. IBM was making a fortune on its hardware sales
and did not want to be distracted.38
While Perot was very successful as an IBM salesman, he became frustrated with the
organization. IBM began tying compensation to seniority to deal with the problem of high-
performance salesmen earning more than their managers. Perot found his territory and sales
quota cut. He reached his sales goal by January 19, 1962, leaving him little incentive to work
hard. With $1,000, Perot incorporated Electronic Data Systems Corporation in Texas on June 27,
1962.39
EDS went public six years after its founding. Soon after going public, the company was valued at
$375 million.40
EDS’s Culture
In creating EDS, Perot also created a culture. In drawing up the plans for EDS in 1962, Perot
drew upon the institutions that made him. “His men would dress like IBMers, behave like the
finest Midshipmen, [and] treat one another like members of a big Texarkana family.”41
According to Perot, “We clearly codified what EDS is, what an EDSer is. Everything is nailed
down as succinctly as possible. I want people who are smart, tough, self-reliant, have a history of
success since childhood, a history of being the best at what they’ve done, people who love to
win.”42
Many military analogies have been used to describe Perot’s employees. They have been referred
to as “the blue suited shock troops of the industry.… Green Berets, Delta Force, computer
commandos.”43 Perot liked the discipline imposed by the military and hired scores of veterans. A
strict dress code was enforced at EDS: no beards, no mustaches, white shirts. Tom Peters, author
of In Search of Excellence, commented on EDS, “they’re like the Marine Corps. Heck, they are
the Marine Corps.”44
6
Working for EDS meant long hours and total commitment to the organization. As an employee,
your professional life became part of your personal life.45
EDS attacked new projects by putting people into teams that resembled SWAT teams. At an
early job for a state’s Medicaid system, “they set up bunks at the job site before Thanksgiving
and did not come out until they had the system designed at Christmas.”46
Fixed-Price Contracts
When EDS worked for a client, the company sought to establish long-term service contracts with
fixed prices. With a fixed- price service contract, EDS would provide its services to the client for
a negotiated fixed rate for the life of the contract. “The customer would know in advance how
much EDS’s services would cost. Meanwhile, EDS would realize large profits toward the end of
the agreement when it would figure out how to provide the service at a much lower cost. With
the contract signed and EDS system in place, EDS employees would continually seek ways of
lowering the cost of operating the system. Any improvements in efficiency would flow directly
to EDS’s bottom line.”47
Reward System at EDS
The rewards for working for EDS could be great. EDS compensated its employees through a
combination of salary, stock, and bonus. In paying bonuses, Perot believed in tying it to a
specific task successfully completed. A bonus for closing a deal with a client could be paid to the
employee the very night the deal is closed.48
A more important motivator was stock and stock options. All EDS employees were eligible for
stock. Perot boasted that his secretary was wealthy from EDS stock. The thinking was that if
employees own stock, they want to do all that is possible to increase its value. The company thus
prospers.
A result of EDS’s compensation plan was that many EDS employees were wealthy; some were
even millionaires. Stock options, ultimately shares of the company, give holders major
motivation to maintain EDS’s profit margins.
While all EDS workers were eligible for stock, the average EDS worker did not enjoy a lavish
compensation package. EDS pensions were not particularly generous, nor was health insurance
particularly comprehensive. These conditions were not due to corporate cost cutting but were
more reflective of Ross Perot’s ideas about incentives. “EDS didn’t reward average workers, it
rewarded the stars.”49
Differences Between the GM and EDS Stock Incentive Plans
GM also had a stock incentive plan. Under this plan, options were issued that entitled employees
to purchase GM stock at a given price in the future. If GM stock rose in price between the time
that the option was issued and when it was exercised, the employee stood to gain the difference.
Therefore, if an employee had an option to buy GM stock at $50, and the stock rose to $60, the
7
employee could realize a $10 per share profit when exercising the option. The EDS plan, on the
other hand, sold the employee EDS stock for a nominal fee (typically five to ten cents per share).
The difference in the plans was that the GM employee had to pay substantially more for the
stock. If employees had taken out loans to buy the stock options, and the price of the stock fell,
they could find themselves in a financial bind.
Ross Perot
H. Ross Perot was born in Texarkana, Texas, on June 27, 1930, to Gabriel and Lulu May Perot.
Young Ross would tag along with his father, a cotton broker in Texarkana, when he would call
on local farmers. Gabriel Perot was an adept salesman and trader, skills that were not lost on
Ross.50
Perot attended the U.S. Naval Academy in Annapolis from 1949 to 1953. Upon graduation, he
reported for duty as an assistant fire-control officer. As his ship was headed for duty in the
Korean War, the truce was signed.
During his term in the Navy, Perot decided that his ambitions to reach the top would not be
satisfied in the military. Many of the factors in deciding a promotion were based on luck,
personal connections, or politics, rather than on drive and ability. Perot decided to search for his
chance at the top in civilian life.51
IV. What Happened--Post Merger
While GM paid $2.55 billion to buy EDS, it was a bargain. First, GM kept 75% of the new GME
shares for itself. The value of these shares would skyrocket once they started trading. With GM
as a major client, EDS’s revenues dramatically increased along with profits and the stock price.
Second, under new U.S. tax laws, GM was allowed to assign a value to the millions of lines of
code developed by EDS for the computer programs that ran the systems it developed. While EDS
spent up to $250 a line to develop this code, for tax purposes the code was carried on the books
at no value. Following the merger, GM was able to revalue the lines of code at $2 billion. Under
IRS rules, the code was fully depreciable, resulting in $1 billion in tax benefits for GM. Factored
in with expected savings due to efficiencies in computer integration, GM expected the EDS
purchase to pay for itself in as little as six months!52
Integration of Data Processing Groups
EDS had a major undertaking on its hands in revamping GM’s data processing function. The first
task was to integrate 7,000 GM data processing employees at 200 data processing locations into
the combined company. In the acquisition, GM data processing employees were transferred to
EDS. As such, the GM employees had to give up overtime pay and accept reduced benefits. GM
employees were also shocked to learn that their job security was suddenly threatened. GM’s
bureaucratic culture had been replaced by the lean-and-mean EDS culture.53
8
The transfer of GM’s data processing employees to EDS was standard operating procedure for
EDS. As was the case at GM, internal data processing managers argued against hiring EDS; they
were proud of their work and resented EDS’s claims of superior performance. The managers also
feared EDS’s corporate culture. Everyone on the job would become EDS employees, subject to
EDS’s code.54
Smith had initially suggested that GM data processing personnel move to EDS but remain
covered by GM’s pay scales and benefits. Perot would not hear of it. He did not want two
different compensation packages for two different classes of employees at EDS. Such a split
work force would detract from EDS’s culture and morale. Smith resorted to a one-time award of
up to $15,000 in GME stock for data processing employees who agreed to give up their generous
GM benefits and transfer to EDS.55
Older workers close to retirement who did not want to lose their GM pensions were permitted to
go on inactive layoff for two years and then retire with full benefits. Workers with enough
seniority were entitled to a sweetened severance package from GM if they chose. About 600 of
7,000 data processors accepted the package.56
The situation that existed in which GM was both EDS’s client and owner was sometimes
problematic for EDS. In the case of the labor negotiations with other clients, Perot may have
fired uncooperative workers. This was not possible under GM’s ownership since the labor
repercussions could reach GM’s production lines. In extreme cases, Perot could sever relations
with a client that did not live up to its agreements. Given the owner relation, this was not an
option with GM.57
Ross Perot tapped Ken Riedlinger to head the EDS group in Detroit. Riedlinger’s counterpart at
GM was F. Alan Smith (no relation to Roger Smith), GM’s vice president of finance. GM’s data
processing group, General Motors Information Services and Computer Activity (GMISCA),
reported to Alan Smith. Riedlinger, a 14-year veteran of EDS, and Mort Meyerson, EDS
president, met with Alan Smith to discuss how EDS and GM’s data processing group would
interact. Alan Smith set up a Monday morning meeting with his top managers to introduce them
to the EDS people.
This type of meeting was not unusual for Riedlinger and Meyerson. When EDS won a contract
with a new client, it would meet the chief of the client’s data processing unit. The chief would
introduce the EDS staffers to his troops and tell them that they now worked for EDS. “It was
more effective for a top manager of the client and the EDS account manager to deliver the news
together, in support of one another, so that the data processing department understood that EDS
was backed by the highest authority.”58
This meeting was somewhat different. This time, the client bought EDS, though Meyerson
believed that the basic relationship would be the same. Alan Smith introduced Meyerson and
Riedlinger with very short and concise remarks. After finishing his remarks, he turned the
meeting over to Meyerson and excused himself saying that he was late for another meeting. He
“turned and walked directly out of the room.”59
9
The EDS men were shocked. Smith was walking out of the organizational meeting of GM’s
biggest acquisition ever. He had not explained anything to the personnel in his group, not how
the group would now function, nor how the group would now be organized. It seemed to the
EDS men that Smith wanted to distance himself from the merger.60 In typical fashion, Roger
Smith had pushed the acquisition of EDS through but had not communicated the plan down
through GM’s organization. No vision was articulated, nor were operational or organizational
details communicated. Middle managers, much like their employees, were learning of the
acquisition through local newspapers.
During the meeting, Meyerson laid out the contract signed by Smith and Perot. EDS would
eventually take over all of GM’s data processing. The GM data processing managers in the
audience were shocked. They had had little warning of how their lives would be changed by the
merger. At the end of the meeting, one manager rose to question Meyerson:
“Let me understand this.... GM bought EDS for $2.5 billion, but we’re going to
work for you?”
“That’s right,” Meyerson said. “All of you, as well as everyone else in GM’s
computer operations, work for EDS--and for me--as of today.”
The man paused. “That means we’re all going to be under your compensation
system and work under EDS’s philosophy?”
“Right again,” Meyerson said.
“And this is going to be a separate company with the EDS name, but owned by
GM?”
Meyerson nodded once more.
The man stopped, unwilling to absorb what he was hearing.
Finally, he sat down. “Bulllll..... shit,” he exclaimed under his breath, loud enough
for Meyerson to hear.61
Most of the managers in the audience belonged to separate GM fiefdoms. They were sponsored
by various GM vice presidents during their way up the corporate ladder. As such, they owed
their loyalties to the heads of different groups or divisions. Further, they believed that their
security and futures were tied to the success of these divisions. These managers were becoming
panicked at the prospect of being forcibly transferred to EDS. Riedlinger and Meyerson were
two EDS soldiers, surrounded in hostile enemy territory.62 EDS employees had encountered
resistance from client employees before but never this heavily and this early into an
engagement.63
GM employees found the EDS group to be arrogant. The company that was bought out was
coming in and acting like the owners.64 All GM data processing employees were transferred to
10
EDS. The GM employees were more than surprised to find that they were now EDS employees.
This meant that they lost their GM compensation and benefits.65 Their pensions were tossed out
as well, replaced with the new Class E stock.66
Poor communication of the deal and its impact on GM was not limited to staff positions. Even
GM vice presidents, such as Alex Mair, received most of the news of the EDS acquisition
through the newspapers. There was virtually no internal communication at GM regarding the
matter. No one briefed Mair of how his group would be affected by the EDS acquisition. Several
days after the announcement of the EDS acquisition, one of Mair’s staffers informed him that
EDS workers were taking inventory of his group’s equipment and tagging it with EDS property
tags. Mair was puzzled at first, but then angry. He threw the EDS people out of the research labs.
He would use all the power he had to keep EDS from overrunning his domain.67
The revolt by the employees was a new problem for EDS. In the past, the company could fire
uncooperative workers at a client site. In this case, however, EDS’s client was also its owner.
EDS’s role was confusing; it was supplier, consultant, and wholly owned subsidiary of GM. The
EDS managers in Detroit were no longer insulated by a client-supplier relationship.68
The fallout was twofold. First, EDS was facing unionization efforts at 14 of the data processing
centers. EDS was a non-union company. GM data processing employees were organizing to fight
the battle to keep overtime and GM’s generous benefits. Second, EDS was facing the challenge
of maintaining its culture in the face of massive hiring and the physical relocation into GM’s
facilities.
EDS managers continued to find resistance long after that initial meeting. When EDS people
tried to interview key GM data managers, they would often not show up for meetings or leave
messages referring them to assistants who invariably did not have the needed information. When
GM managers were finally cornered, they would volunteer little, preferring to hand over stacks
of reports to read instead of explaining how systems worked. The resistance wore on the EDS
people. On top of long hours at GM and a hostile work environment, the EDS people found
themselves the targets of harassment. Tires were slashed, threatening notes were left on
windshields, and unordered pizzas were delivered.69
While EDS managers had faced resistance at the sites of other clients, the fact that GM owned
EDS in this case made management of the conflict difficult. The main EDS office in Dallas
could not act as a mediator between the EDS troops in the field and the client in this case.
Meyerson had been promised the title of Vice President, but this promise had evaporated. The
EDS managers in Detroit felt their power diminishing. At Perot’s urging, Smith called several
meetings to order executives to be more cooperative, but nothing seemed to help.70
The frustrations for EDS’s managers in Detroit continued. Mort Meyerson commented:
After nine months on the job, there’s still no feeling of camaraderie among EDS
and GM data processing people. There’s very little teamwork. The lower-level
people are getting their signals from the executive ranks, most of whom oppose
11
the deal and actively subvert it. That translates into constant negative attitudes as
you go down the organizational ladder.71
Despite all the distractions, EDS slowly began to show progress at GM. EDS had been able to
integrate existing computer systems and develop new ones. EDS also saved GM $120 million by
consolidating purchases of equipment and software.72
The Clash Over Stock Options
In the original merger agreement, Perot was to retain control over the stock incentive plan for
EDS employees. This incentive plan was much different than the one in place for GM
employees. Smith sought to end the EDS stock incentive plan and replace it with the standard
GM system.73 Given the poor performance of GM stock, EDS employees were less than thrilled
with this prospect. GM’s stock had not grown significantly in years but did pay a hefty dividend.
EDS employees, however, did not care so much about the dividend. They were interested in
capital gains. They wanted to see the fruit of their labors reflected in the stock price.74
Perot attributed Smith’s move to “the personal jealousy factor.” Under the EDS plan, with the
stock incentives, some EDS employees stood to earn more than the chairman of the world’s
largest automobile company.75
Smith and top EDS executives faced off over the stock issue in Dallas. “We were stunned,” Perot
says. “Roger launched into an uncontrolled rage at the people in the room.” While the issue was
resolved through a compromise, the incident soured relations between the two groups.76
Pricing EDS’s work at GM
The original agreement between GM and EDS specified that EDS could establish long-term
fixed-price contracts for its services. GM’s finance men did not like this because it would
eliminate the company’s ability to control costs.
EDS virtually dictated contract terms. The higher outlays for EDS computer software systems
promised lower divisional operating profits, which certainly was going to reflect badly on their
financial targets and year-end bonuses. EDS claimed the newer, expensive systems improved
overall productivity and saved money; and, in any case, EDS profits resulted in value gains
through the GM Class E stock that GM owned, an idea that GM comptrollers did not accept.77
GM’s finance men were puzzled. They had bought EDS, yet they were not going to receive
preferential pricing. Fixed-price contracts did not seem like much of a bargain. The only winners
would be on the EDS side. Since the dividends paid on GME stock, widely held by EDS
employees, was based on EDS’s earnings, EDS employees had strong incentive to charge GM as
much as possible.78
With EDS, many GM managers found that their computing costs were going up. Some GM
managers simply refused to sign contracts with EDS. One manager told another, “It will be a
cold day in hell before I will make those bastards from Texas richer.” Battle lines formed
12
between the EDS managers trying to get the contracts signed and the GM managers reluctant to
sign them.79
The situation of GM as both client and owner greatly contributed to the pricing issue. If a fixed-
price contract allowed EDS to realize tremendous profits at the end of the contract’s term, then
GM must be paying too much for EDS’s services at that point. What could be savings for GM’s
operations ended up in EDS’s coffers.
Peace Treaty on Pricing
A compromise on the pricing issue between GM and EDS was announced on April 28, 1986, at a
briefing for Wall Street security analysts. EDS would bill GM on a cost plus 12% to 14% profit
basis for 35% of its revenue from GM. For another 10% to 15% of GM revenues, billing would
be on the basis of long-term fixed-price contracts. The final 50% would be on a cost-sharing,
overrun-sharing arrangement, with a guarantee of at least 9.5% profit margin.
After the departure of Meyerson and Perot, GM did little to change the way EDS operated. With
the buyout of Perot behind them, the remaining EDS people regrouped and refocused their
energies on the matters at hand. A Corporate Information Management group was created to
provide an interface between GM and EDS. Business for EDS was quite strong, with GM
operating divisions signing contracts for EDS’s services. GME stock did not drop as expected
after Perot’s departure. In fact, its price rose to the high 30s in early 1987, with EDS’s non-GM
revenue growing more than 20% each year through 1988.80
Auditing EDS’s Books
Another clash occurred over the issue of who would audit EDS’s books. According to the
original merger agreement, EDS was to maintain its own auditing staff. Several months later,
GM sought to audit EDS’s books. Perot would not let them. According to Perot,
It was classic Roger. At the time of the transaction, we agreed that EDS would
keep its own internal audit team and would keep its own public auditor. A few
months later, GM comes in and tries to take over. I said, “Now if this is really
important to you, I don’t care, but the point is you need to understand that we had
a clear written agreement how this would be done at the time of the purchase.” If
you take General Motors’ procedures and impose them on EDS, you’re going to
have a GM-ized EDS that in three or four years isn’t competitive. But that’s just
GM’s nature.81
Perot maintained that he only sought to preserve the autonomy that was promised to EDS in the
merger agreement. GM, however, wanted to keep EDS honest. Without auditing EDS’s books,
GM could not know how EDS’s profit margins on GM worked. With EDS profits reflected only
in GME stock, GM shareholders might feel exploited if EDS made too much profit from GM.82
While the merger agreement specified that EDS would have independent auditors check its
books, GM traditionally performed detailed audits on each of its divisions. There were no
13
exceptions. Further, the peace treaty on pricing stipulated that GM be able to check EDS’s books
to check EDS’s costs for work done at GM. Perot was so adamant against an audit by GM’s staff
that he offered to pay for an internal audit of EDS by a major accounting firm in addition to
EDS’s normal yearly audit.83
Perot’s Crusade
As a condition of the merger agreement, Perot had a seat on GM’s board. From this perch, Perot
watched GM’s profitability and market share continue to decline. Although he was outspoken
about GM’s problems from the start of his tenure on the board, he slowly began to take his cause
directly to the public.
Perot personally researched GM’s woes by traveling around the country, “meeting with GM
dealers, assembly-line workers, middle managers, executives and industry analysts in a search
for solutions to the carmaker’s problems.” Perot concluded that GM was not moving quickly or
effectively enough to reverse its slide.84
While some other outside members of the board were happy with Perot’s criticism, others were
not. One faction of the board was pushing Perot to tone down his criticism.85
While Perot had explicitly stated that he had no designs on the chairmanship of GM, he did have
his own ideas about how to turn the company around. Perot believed that GM must first
acknowledge that problems exist. GM’s executives, however, refused to acknowledge the
automaker’s problems. Smith, in particular, refused to express concern, instead pointing to
climbing sales figures for new models.86
Even one of GM’s successes of the 1980s carried with it disturbing implications for the
automaker. Smith initiated a joint venture with Toyota, New United Motor Manufacturing Inc.
(NUMMI), to learn Japan’s secrets in building profitable small cars. Chevrolet Novas were built
in an old GM plant by a crew of UAW workers who were once considered among the company’s
worst. The result: the productivity of the plant is double most other GM plants. The difference
lay in NUMMI’s management. It was designed by Toyota.87
This experience highlights the conflict between Smith and Perot. While Perot maintained that the
company was not moving forward fast enough, Smith believed that he was changing the
company as fast as possible.88 Perot considered the NUMMI experiment proof that Roger
Smith’s vision of nearly fully automated automobile production would not cure all of GM’s
woes. GM had to move to revamp its management philosophies to regain its competitiveness.
Perot did not believe that Smith saw a need to change GM’s management.
The Buyout of Ross Perot
Perot’s crusade to turn GM around rankled top GM executives and GM’s board. In May 1986,
Perot wrote a letter to Smith outlining several options including a “friendly” buyout of his shares
by GM. Elmer Johnson, corporate counsel at GM, met with Perot shortly thereafter to discuss
this possibility, but Perot said that he was not seriously looking for a buyout.
14
In the following months, Perot’s criticisms of GM became harsher and more public. He took
shots at GM’s management in a number of business and trade journals. Behind the scenes, Perot
had conceived a plan where GM would sell all but 25% of EDS to AT&T to return the company
to its pre-GM state. When this deal fell through, Perot’s earlier recommendation of a friendly
buyout of his shares by GM began to look like the best course of action.89
The battle over the auditing issue ended during the talks with AT&T. As a goodwill gesture
toward GM, and hoping to get the negotiations moving with AT&T, Perot relented and gave GM
auditors access to EDS’s books.90
On December 1, 1986, GM’s board offered to buy back Perot’s shares for $742.8 million,
including amounts given to three other key EDS executives. There was a non-compete clause in
the agreement that prevented Perot from starting a venture that would compete with EDS for a
given time. Perot also could not hire people from EDS for a given time. To minimize negative
publicity, a $7.5 million penalty was included that would be charged to either party for publicly
lambasting the other.91
On a fiscal basis, the acquisition of EDS was a success. EDS’s net income rose from $190
million in 1985 to over $435 million in 1989, while revenues increased from $3.4 billion to $5.5
billion in the same time period.92 GM provided 70% of EDS’s $4.3 billion in revenues in 1986.
Still, EDS’s outside contracts had larger margins and offered the fastest growth. Margins on non-
GM contracts routinely ran at 14% and often over 20%.93
Epilogue
In July 1996, EDS was spun off from GM, making it the largest independent computer services
company in the U.S. Current EDS Chairman Les Alberthal said of the move:
The split-off sets the stage for EDS’s future growth. It will greatly improve our
ability to enter markets and forge business alliances we can’t currently pursue,
improve our access to capital, and allow us the benefits of an independent outside
board of directors focused solely on EDS’s business.94
Under terms of the agreement, each share of Class E GM stock was exchanged for one share of
common EDS stock. EDS also made a one-time payment to General Motors of $500 million. The
move gives EDS the option of raising its own funds via stock issues as well as additional
flexibility to enter new market sectors.
© Copyright 1994, Richard D. Freedman
15
Endnotes
1
Maryann Keller, Rude Awakening, (New York: Harper Perennial, 1989), p. 150.
2
Ibid., p. 146.
3
Ibid., pp. 146-51.
4
Doran P. Levin, Irreconcilable Differences, (Boston: Little, Brown & Company, 1989), pp. 69-
70.
5
Maryann Keller, Rude Awakening, (New York: Harper Perennial, 1989), pp. 146-47.
6
Ibid., p. 146.
7
Ibid., pp. 146-47.
8
Albert Lee, Call Me Roger, (Chicago: Contemporary Books, 1988), p. 13.
9
Doran P. Levin, Irreconcilable Differences, (Boston: Little, Brown & Company, 1989), p. 165.
10
Ibid., p. 169.
11
12
Albert Lee, Call Me Roger, (Chicago: Contemporary Books, 1988) pp. 145-47.
13
14
Ibid., p. 165.
15
Ibid., p. 111.
16
Ibid., pp. 11-12.
17
Ibid., pp. 74-5.
18
19
Todd Mason and Richard Brandt, “How Ross Perot’s Shock Troops Ran Into Flak at GM,”
Business Week, February 11, 1985, p. 118.
20
Doran P. Levin, Irreconcilable Differences, (Boston: Little, Brown & Company, 1989) p. 91.
21
22
Ibid.
23
Ibid., pp. 47-50.
24
Ibid., p. 65.
25
Ibid., pp. 30-31.
26
Ibid., p. 31.
27
Ibid., p. 34.
28
Ibid., p. 33.
29
Ibid., p. 155.
30
Doran P. Levin, Irreconcilable Differences, (Boston: Little, Brown & Company, 1989) pp.
128-29.
31
Ibid., pp. 129-30.
32
Ibid., pp. 129-30.
33
Ibid., p. 131.
34
Ibid., p. 63.
35
Ibid., p. 65.
36
Todd Mason, Russell Mitchell, William J. Hampton, and Marc Frons, “Crunch Time for
General Motors,” Business Week, October 6, 1986, p. 60.
37
David Remnick, “Our Nation Turns Its Lonely Eyes to H. Ross Perot,” The Washington Post
Magazine, April 12, 1987, p. 29.
38
Alan Farnham, “And Now, Here’s the Man Himself,” Fortune, June 15, 1992, p. 69.
16
39
Doran P. Levin, Irreconcilable Differences, (Boston: Little, Brown & Company, 1989) p. 24-
6.
40
Farnham, Alan, “And Now, Here’s the Man Himself,” Fortune, June 15, 1992, p. 69.
41
David Remnick, “Our Nation Turns Its Lonely Eyes to H. Ross Perot,” The Washington Post
Magazine, April 12, 1987, p. 30.
42
Ibid.
43
Ibid.
44
Ibid.
45
Ibid.
46
Albert Lee, Call Me Roger, (Chicago: Contemporary Books, 1988), p. 149.
47
Maryann Keller, Rude Awakening, (New York: Harper Perennial, 1989), p.155.
48
Doran P.Levin, Irreconcilable Differences, (Boston: Little, Brown & Company, 1989), p. 91.
49
Ibid., p. 182.
50
Ibid., pp. 16-18.
51
Ibid., pp. 22-3.
52
Ibid., p. 164.
53
54
55
Ibid., p. 206.
56
Ibid., p. 206.
57
Ibid., p. 207.
58
Ibid., p. 172.
59
Ibid., pp. 172-73.
60
Ibid., p. 173.
61
Ibid., p. 174.
62
Ibid.
63
Ibid., p. 175.
64
65
66
Maryann Keller, Rude Awakening, (New York: Harper Perennial, 1989), pp.146-47.
67
68
Ibid., p. 207.
69
Ibid., p. 181.
70
Ibid., pp. 207-08.
71
Ibid., p. 213.
72
Ibid., pp. 208-13.
73
David Remnick, “H. Ross Perot to GM: ‘I’ll Drive.’ GM to H. Ross Perot: ‘Oh, Yeah?,’” The
Washington Post Magazine, April 19, 1987, p. 27.
74
75
David Remnick “H. Ross Perot to GM: ‘I’ll Drive.’ GM to H. Ross Perot: ‘Oh, Yeah?,’” The
76
Ibid.
77
17
78
Russell Mitchell and Todd Mason, “The Risks of Running EDS Without Perot,” Business
Week, December 15, 1986, p. 27.
79
Thomas Moore, “Crunch Time for General Motors,” Fortune, February 15, 1988, p. 38.
80
81
David Remnick, “H. Ross Perot to GM: ‘I’ll Drive.’ GM to H. Ross Perot: ‘Oh, Yeah?,’” The
82
83
Ibid., pp. 299-300.
84
Todd Mason, Russell Mitchell, William J. Hampton, and Marc Frons, “Crunch Time for
General Motors,” Business Week, October 6, 1986, p. 60.
85
Ibid.
86
Ibid.
87
Ibid., pp. 61-2.
88
Ibid, p. 62.
89
90
Doran P.Levin, Irreconcilable Differences, (Boston: Little, Brown & Company, 1989), pp.
302-03.
91
92
1990 GM Annual Report.
93
Russell Mitchell and Todd Mason, “The Risks of Running EDS Without Perot,” Business
Week, December 15, 1986, p. 27.
94
Kiernan Murray “General Motors to Spin Off EDS Unit to Stockholders,” Reuter Business
Report, April 1, 1996.
Last Modified: 5/23/01
18

GM Eds

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

GM Eds

Uploaded by

Copyright:

Available Formats

NEW YORK UNIVERSITY LEONARD N.

STERN SCHOOL OF BUSINESS

General Motors and EDS

New York University

The GM-EDS Merger

I. Reasons for the Merger - What Drove Each Side to Merge

II. The Merger Agreement

III. The Companies

By the start of Smith’s tenure as chairman, nowhere in GM would freethinking, opinionated

Reward System at EDS

Differences Between the GM and EDS Stock Incentive Plans

IV. What Happened--Post Merger

Integration of Data Processing Groups

“Right again,” Meyerson said.

Meyerson nodded once more.

The man stopped, unwilling to absorb what he was hearing.

The Clash Over Stock Options

Pricing EDS’s work at GM

Peace Treaty on Pricing

Auditing EDS’s Books

The Buyout of Ross Perot

© Copyright 1994, Richard D. Freedman

Last Modified: 5/23/01

You might also like