Electronic Data Systems (EDS)

Electronic Data Systems (EDS) was an American multinational information technology equipment and services company headquartered in Plano, Texas. Founded in 1962 by the legendary entrepreneur H. Ross Perot, EDS essentially created the IT outsourcing industry. The company's core business was 'facilities management,' where it would take over and run a client's entire data processing operation under a long-term, fixed-price contract. This was a revolutionary concept at a time when computing was a mysterious and expensive back-office function for most corporations. EDS grew into a global titan by promising efficiency, reliability, and cost savings to large corporations and government agencies. Its journey included a high-profile period as a subsidiary of General Motors (GM), a subsequent spinoff as an independent public company, and a final chapter as a major, but ultimately troubled, acquisition by Hewlett-Packard (HP). The story of EDS is a fantastic case study in innovation, corporate culture, shifting competitive landscapes, and the dangers of paying too much for a fading star.

The rise and fall of EDS is a drama in three acts, offering timeless lessons for any investor about how quickly industries and corporate fortunes can change.

H. Ross Perot founded EDS with just $1,000 and a powerful idea. He saw that companies were buying hugely expensive mainframe computers but lacked the expertise to run them effectively. EDS's pitch was simple: let us handle it. Perot built the company with a unique, quasi-military culture that emphasized discipline, results, and a fanatical commitment to the customer. He recruited heavily from the military, and his clean-cut, dark-suited “EDS-men” became an iconic image of corporate America. This model was incredibly successful. By signing clients to long-term contracts, typically 5-10 years, EDS created a business with highly predictable, recurring revenue—a dream for any investor. This model built a formidable economic moat based on deep institutional knowledge and high switching costs; once EDS was running a company's entire IT nervous system, it was incredibly difficult and risky to fire them.

In 1984, GM acquired EDS for $2.5 billion in an attempt to modernize its own sprawling and chaotic IT operations and diversify its business. The deal made Perot a billionaire and gave him a seat on GM's board. What followed was one of the most famous culture clashes in business history. Perot, the nimble and decisive entrepreneur, was horrified by GM's bureaucracy. He famously quipped, “The first thing you've got to do is get all the snakes out of the woodwork… At GM, it's like a snake pit.” The relationship soured, and in 1986, GM paid Perot $700 million to buy out his stake and force him off the board. Despite the drama, EDS continued to operate as an independent subsidiary, eventually being spun off to shareholders in 1996.

As an independent company in the late 1990s and 2000s, EDS faced a new world. The IT services industry it had pioneered was now crowded and global.

• Intense Competition: Offshore rivals from India, such as Infosys and Tata Consultancy Services, offered similar services at a fraction of the cost, eroding EDS's pricing power.
• Technological Shifts: The rise of the internet, smaller servers, and eventually cloud computing began to make the old model of managing a client's centralized mainframe look obsolete.

In 2008, seeking to challenge IBM's dominance in IT services, Hewlett-Packard acquired EDS for a hefty $13.9 billion. From a value investing perspective, this was a classic strategic blunder. HP paid a massive premium for a company whose competitive advantages were visibly eroding. The integration was difficult, and HP was forced to write down almost the entire value of the acquisition just a few years later. The EDS name was eventually retired, and its operations were absorbed into what is now HP Enterprise Services.

The EDS saga is more than just a business history lesson; it's a treasure trove of investing wisdom.

EDS is the perfect example of how even the strongest economic moats are not permanent. For decades, its moat, built on long-term contracts and specialized expertise, seemed unbreachable. However, globalization and technological disruption completely changed the landscape. For investors, the key takeaway is that you must constantly re-evaluate a company's competitive position. A moat that was wide yesterday may be a shallow ditch tomorrow. Never fall in love with a company's history; focus on its future.

The HP-EDS deal is a textbook case of what Peter Lynch called “diworsification”—a company making a large acquisition in an area it doesn't fully understand, ultimately destroying shareholder value. HP's leadership was chasing a rival (IBM) and paid a price that left no margin of safety. They bought based on EDS's past reputation, not its deteriorating future prospects. This highlights a core value investing principle: It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. In this case, HP bought a fair (and fading) company at a terrible price.

In its heyday, EDS's success was inseparable from Ross Perot's leadership and the powerful culture he instilled. His focus, drive, and customer-first ethos were the engine of growth. When analyzing a potential investment, the quality and alignment of management are paramount. A brilliant founder can create immense value, but investors must also consider what happens when that visionary leader departs, as the culture they built may not survive them. As Perot himself said, “Eagles don't flock. You have to find them one at a time.” For investors, finding a business led by an “eagle” can make all the difference.