Thursday, September 19, 2002

P&G may have outsourcing deal

Electronic Data Systems likely to provide services

By Cliff Peale,
The Cincinnati Enquirer

        Procter & Gamble Co. may announce as soon as today that Electronic Data Systems Corp. will buy and operate most of its back-office services.

        Cincinnati-based P&G was telling employees Wednesday to expect a worldwide announcement on an outsourcing deal today. A source close to the negotiations confirmed that the potential partner is EDS.

        While P&G would not comment Wednesday and EDS didn't return phone calls, the negotiations apparently came together within the last two weeks. EDS had withdrawn from the bidding in July. Its rival, Affiliated Computer Services Inc., terminated talks with P&G late Monday.

        The P&G-EDS deal could become complicated, however, after EDS stock dived Wednesday after the close of the stock market.

        At least a portion of the purchase price is to be paid in EDS stock. Those shares fell $1.30 to $36.46 during regular trading hours Wednesday before EDS predicted after the close that its third-quarter revenue would fall as much as 5 percent, with earnings of 12 cents to 15 cents a share, well below previous estimates. EDS shares then fell below $25 in after-hours trading.

        At $25, EDS shares have lost almost two-thirds of their value since the beginning of the year.

        In the proposed deal, about 5,700 P&G employees would move to EDS, which would purchase P&G's global technology platform and functions such as workplace services and purchasing. EDS then would sign a long-term deal to provide those services to P&G.

        It would be a breakthrough for P&G, which has been spent more than a year seeking a deal that would outsource most business services, streamline its corporate structure and allow it to concentrate on core development and marketing units.

        P&G executives previously have said the deal will help employees by putting them inside a company that matches their core strengths.

        But workers in the affected Global Business Services unit have privately complained about the uncertainty of being forced to work for another company. P&G executives have spent months negotiating to give every employee a job offer with no reduced salary, and a P&G-equivalent separation package for two years if they were terminated.

        P&G has continued to talk to employees about other personnel issues, particularly the effect of any deal on workers' profit-sharing plans.

        Wall Street investors have heralded the deal since P&G publicly acknowledged negotiations in June. They call it a sign that P&G will continue to cut costs as the savings from its 1999 restructuring dissipate after this year. “It's vital that they keep doing things like this,” said Doug Christopher, an analyst who studies P&G at Crowell, Weedon & Co. in Los Angeles.

        P&G's stock price increased 4 cents Wednesday, closing at $92.10.

        The P&G assets to be sold include service centers in Manila, Costa Rica and Newcastle, England, and data centers in Singapore, Brussels and Blue Ash.

        It was unclear why EDS re-entered the bidding this month. But when it withdrew, the Plano, Texas-based company was embroiled in the fallout from its contracts with scandal-ridden client WorldCom Inc.

        ACS officials said they withdrew from the bidding this week because some of the P&G functions were highly customized to P&G and difficult to translate to other customers or geographies.

        But while ACS was counting on the Procter deal to build that worldwide platform, EDS already has it. The company employs more than 140,000 workers in 60 countries, with more than 35,000 clients and revenue of about $21.5 billion last year.

        Ross Perot founded EDS in 1962. He sold it to General Motors Corp. in 1984, and the company spun off as an independent entity in 1996.


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