Sale of EDS' PLM Unit Seen Good for All

On its own, profitable UGS will be free to devote more resources to R&D, form new integration alliances, analyst says

On its own, profitable UGS will be free to devote more resources to R&D, form new integration alliances, analyst says

Plano, TX — March 19, 2004 — The decision by outsourced services provider EDS to sell its product lifecycle management (PLM) unit to a group of three private equity firms may be a winning move for all parties, according to at least one industry analyst.

EDS announced earlier this week that it had reached a definitive agreement to sell its UGS PLM Solutions unit for $2.05 billion in cash to a group that includes Bain Capital, Silver Lake Partners and Warburg Pincus. The transaction is slated to close within 90 days, pending customary closing conditions.

The deal is expected to help EDS reach its goal of zero net debt by the end of this year. EDS had announced its decision to divest UGS PLM Solutions through an IPO or private sale in October 2003. On Thursday, EDS announced the sale of its automotive retail group to a unit of payroll giant Automatic Data Processing (ADP).

UGS PLM Solutions, once known as Unigraphics Solutions, has approximately 5,000 employees, and its customer base has included such companies as Boeing, Samsung Electronics, Nokia and Mitsubishi. EDS bought the outstanding shares in UGS in October 2001.

"While UGS PLM Solutions is an excellent business and has been a solid contributor to EDS, its business is clearly outside of our core focus," said Bob Swan, EDS' chief financial officer, in a company statement. "As a result, we're essentially divesting a non-core, non-strategic operation, while enabling UGS PLM Solutions to further enhance its future growth."

In 2003 UGS PLM Solutions generated $897 million in revenue and $104 million in net income. EDS as a whole reported about $21.5 billion in revenues for 2003.

John Moore, a vice president with technology research firm ARC Advisory Group, said that the deal was not entirely unexpected but did offer a few interesting aspects. "Originally, EDS intended to spin-out this subsidiary as an IPO and maintain a significant majority share, approximately 80 percent," Moore said. "But with growing debt, creditors knocking at the door and an impending Moody's rating, EDS had to move quickly to raise cash, thus the wholesale sell-off of UGS PLM to these three investment partners."

Moore suggested that the sale would be good news for the PLM unit. "UGS PLM can now run their operation as a software company and not be encumbered with EDS's service oriented business model," he explained. "This will also allow them to more aggressively invest in [research and development], something which EDS did not strongly support."

Most importantly, the analyst said, UGS PLM now will be free to partner with any systems integrator in the market, including EDS competitors that are seeking a strong PLM player with which to partner in order to compete with IBM, which has a strong alliance with product lifecycle management provider Dassault.