General Motors Corp and Sprint Corp yesterday confirmed that the two are discussing a possible merger between Sprint and the motor giant’s Electronic Data Systems Corp computer services unit – but any such transaction would likely involve an independent Electronic Data Systems buying Sprint rather then the other way round. General Motors also confirmed that it is considering spinning off the Dallas company, which it bought in 1983 for $2,500m but which is now said to be worth between $15,000m and $16,000m. The companies issued a joint statement saying that any alliance could involve a merger of equals, but might also end up simply as a business venture or partial combination. Such a tie-up would transform the standing of Sprint, currently a poor third in the US long-distance telephone service market, and would make it far stronger in computer services than any of its competitors home or abroad. The biggest obstacle in the path of a spin-off of Electronic Data Systems is the arcane equity structure that General Motors created when it bought the company. General Motors owns 100% of the equity of EDS, but issued a special Class E of General Motors common for the company, which entitles holders to a dividend tied to the performance of EDS. Any merger with Sprint would require General Motors to exchange the Class E shares for Electronic Data Systems common. Sprint is running at over $11,000m a year and Electronic Data Systems is now one of the biggest computer companies in the world with annual turnover of $8,600m – and by far the biggest without its own manufacturing. Should it become an independent company, General Motors would baptise the new baby with a 10-year master agreement, with options for renewal, under which it would continue to provide the same services for the automaker that it does today – that business still accounts for 38% of total turnover. To make any spin-off acceptable to Class E shareholders, the US Internal Revenue Service would have to agree that holders would not be liable to capital gains tax on the share exchange – a request for such approval has already reportedly been made. Shareholders will likely be asked to waive a provision in General Motors’ byelaws requiring a 120% premium if General Motors swaps new stock for Class E shares – and would likely agree because the new Electronic Data common would likely trade at higher price than the limited Class E. The first step towards a divestiture came last week when General Motors announced that it had won approval from US federal pension regulators to fund part of its $22,000 shortfall in its pension funds by giving one of them all of its Class E shares, valued at about $6,000m.
