EDS: Fit Never Achieved With Subscription Fulfillment Division

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As Electronic Data Systems Corp. seeks a buyer for its subscription fulfillment division, a company official admitted last week that the fit between the two just never happened.


"We think the business would be better served by a provider who is more focused on that segment," EDS spokesman Doug DeLay said.


On Sept. 18, the computer services giant founded by Ross Perot said that it wanted to sell the Louisville, CO, division and warned that its earnings would fall 80 percent for the third quarter. The next day, the company's stock dropped more than 50 percent in value. Shares fell even further last week, at one point to their lowest level since 1989.


EDS, Plano, TX, bought the fulfillment operation from Neodata in 1997 for $300 million and combined it with several other companies it had acquired into its Centrobe division. The Centrobe name has since been phased out in favor of EDS.


Neodata, founded in 1949 as the subscription fulfillment arm of Esquire magazine, has served publishing clients in the consumer and business magazine and book publishing arena for more than 50 years, providing subscription order management, list conversion, payment processing and billing, and label preparation and distribution.


Though a buyer has not been found, DeLay said several companies have approached EDS over the past two years.


"There are about 20 parties who have expressed interest in the business," DeLay said, though he declined to name any of them.


It is unclear how much the subscription portion of EDS' business has affected its overall financial troubles given that its core business is information technology. In its announcement Sept. 18, the company said the decision to exit the subscription fulfillment division would reduce its third-quarter earnings by 8 cents a share.


However, several big clients left EDS for competitors in the past year. Conde Nast and Gruner + Jahr USA Publishing moved their subscription fulfillment processing to Communications Data Services Inc., Des Moines, IA, while Primedia relocated its business to Palm Coast Data, Palm Coast, FL.


"Over the last year or so, we have seen a number of our clients move away from EDS," said Jim Long, vice president of sales at Millard Group Inc., Peterborough, NH.


But Long added that publishing accounts move a great deal and that he has a limited perspective on the service providers because list fulfillment is a small part of what they do for publishers.


"From my list rental perspective, the quality of the work got better after EDS bought Neodata," he said.


EDS employs 800 people at the Louisville plant, servicing 100 million active subscriptions for 325 magazine titles. According to its Web site, clients include Hachette Filipacchi, Harvard Business Review, Meredith Publishing and Newsweek. EDS is second in size to CDS, which is owned by Hearst Corp. Though CDS declined to comment for this article, its Web site claims that it services 142 million subscribers for more than 400 clients, including Hearst's publications.


It is likely that CDS, Palm Coast and a third rival -- Kable Fulfillment Services, Mount Morris, IL, a division of Kable News Co. Inc. -- would at least consider acquiring EDS' subscription division, said Dan Capell, editor of Capell's Circulation Report, Ridgewood, NJ.


Palm Coast and Kable representatives did not return calls for comment.


If acquired, Capell said, the division likely would be kept intact. The sheer volume of the business probably would prevent another company from absorbing it into its own facility. According to the Postal Rate Commission, EDS receives more than 55 million pieces of Qualified Business Reply Mail each year and spends more than $45 million on this as well as outgoing postage.


Though some of EDS' troubles can be traced to company-specific issues -- including its exposure to US Airways and WorldCom, both of which have filed for Chapter 11 bankruptcy protection -- its managers attributed much of the problem to what they said was a halt in spending by large corporations.


"We expected spending to tighten ... not virtually stop," EDS chairman/CEO Dick Brown said in a conference call earlier this month.


It is unknown how much EDS expects to get for the subscription fulfillment division or how long it will operate it if no buyer is found. Capell said some clients might get antsy if something isn't announced soon, though it isn't apparent that any have jumped ship. The Wall Street Journal reported last week that EDS' other divisions haven't been affected by the company's troubles. Procter & Gamble Co. said it still plans to sell its back-office operations to EDS and award a long-term contract to manage them. The Journal reported the value of the contract at $6 billion. On Friday, EDS said it signed a $142 million contract to develop a directory ad e-mail service for the United Kingdom's National Health Service.


If EDS shut down the subscription fulfillment division, it would be disastrous for its publishing clients, Capell said.


"That would have a really negative impact because clients would not be able to switch providers literally overnight," he said. "Of course, they could go to other providers, but it takes time."


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