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February 3, 1999


By CBR Staff Writer

One of the largest of all privately held providers of IT technology consulting and services finally went public this week – and had a enthusiastic reception with the shares rocketing 153% to $40.5 on the first day of trading. But Perot Systems’ first flirtation is a wary one with only 6.2% of stock up for grabs. The company was founded by former US presidential candidate Ross Perot on June 1, 1988, exactly 18 months after Perot left EDS, the company he founded in 1962. EDS is now one of Perot Systems’ chief rivals in the field of systems management and systems integration to a range of vertical markets concentrated on finance, energy, health and travel. Under the terms of his departure from EDS, Perot agreed that his new organization was not to make a profit until January 1990. By the time the ‘profit embargo’ had passed, Perot Systems had built the foundations of a massive IT services organization, with revenues of more than $780m in fiscal 1997, almost one third of which is sourced from its European operation, founded in 1990. Perot currently has over 5,500 employees, up 14.9% from 1996, in 40 locations worldwide. Perot Systems has undergone a series of transitions over the years in its approach to the IT services industry, showing an ability to move with the times despite, or at times in spite of, the conservative image of its founder. In the early years of the company, revenue was obtained mainly through long-term unit-price or fixed-price facilities management contracts. The original non-profit agreement under which Perot Systems traded at its inception probably gave the company an advantage in the market, enabling it to undercut competition while maintaining high standards of workmanship and retaining high quality personnel. But it wasn’t all plain sailing. A combination of promising more than the company was able to deliver and outspoken, anti-NAFTA comments on the part of Ross Perot himself helped lose important potential contracts in Mexico, causing the company some financial difficulties. However, the company experienced a shake-up when Ross Perot’s political leanings resulted in his entry into the presidential race in 1992. With Mort Meyerson as the new CEO, Perot Systems began to shift focus from traditional outsourcing towards more profitable consulting services. It also began increasing expertise in specific market and product sectors, in order to provide a more comprehensive service to customers. This new focus has not altered significantly, despite Meyerson’s decision to step down as CEO in September 1996, with company founder Ross Perot reassuming the top spot. After a comparatively poor fiscal 1997, Perot Systems looks to be heading for its best year yet. In the nine months ended September 30, 1998, the company reported revenues of $724.2m, an increase of 30% on the total of $556.9m recorded over the same period last year, and is projected to reach $1bn for the full year. This would represent a 28% increase over the 1997 total of $781.6m, which was itself an increase of 30.4% over 1996. All in all, Perot Systems finances look to be in good order. Currently Ross Perot himself owns more than 40% of the firm, former chairman Mort Meyerson owns another 10%, and more than 90% of the company’s employees hold further shares. In addition, Perot Systems’ largest customer, UBS, also holds a sizable stake in the company. Under the initial terms of the 10-year, $250m outsourcing deal – announced in September, 1995 – Swiss Bank (now merged with UBS) received five million newly issued non-voting shares. Subsequently UBS has bought a further 934,320 shares and also possesses 6,400,000 options. Subject to a restriction limiting the number of Perot shares owned by UBS and its employees to 10% of the number of outstanding shares, UBS can exercise these options for $3.65 per share at a rate of 63,906 shares per month until January 1, 2002 and a rate of 58,334 shares per month thereafter until the services agreement terminates. In an attempt to fend off takeover bids following the IPO, UBS has the right to cancel its contract with Perot Systems if a competitor buys more than 25% of the company. This weekÆs IPO is surely a sign that founder Ross Perot believes his firm has finally come of age. The share offering represents some 6.2% of Perot Systems outstanding stock of 89,068,910. The tentativeness of Perot System’s IPO makes sense in the light of two factors: first, Ross Perot’s wish not to repeat his experience with losing control of his last company, EDS; and second, a desire to protect the investment of Perot Systems largest customer, UBS. As for plans in the wake of its IPO, further consolidation of its position as a leading provider of services to the healthcare industry in its US heartland seems likely, as does the continuation of its policy of acquisition and partnership. But while consolidation is fine for a private company, public ones need to show more dynamism. In this respect the company is already well placed to expand further on its European business. It will also be interesting to see whether the success the company has had in the financial and energy industries in Europe can be repeated on its home turf. Another area of interest will be Perot Systems’ reaction to the increasing industry wide drive towards ERP. Its recently announced partnership with mid-sized ERP vendor JD Edwards indicates an acknowledgement that its expertise in business processes needs to be backed by software support. More partnerships are likely to follow.

This article is part of ComputerWire’s European Computer Services information service. Some articles from the service are being provided to ComputerGram subscribers for a trial period only.

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