EDS Looking for Megadeals

Despite its powerhouse status in the information technology (IT) space, Electronic Data Systems (NYSE: EDS  ) hit a speed bump recently. News of its fiscal Q1 report last Thursday sank the company's stock by 6%, to $27.49, amid fears that corporate IT spending is softening.

EDS posted a 3% increase in revenue to $5.22 billion and snagged $3.4 billion in contract signings. While this compares to $10 billion in contract signings in Q1 of 2006, that period included outsized deals from General Motors (NYSE: GM  ) and the U.S. Navy.

First-quarter profits for EDS surged almost sevenfold, to $164 million or $0.31 per share, but free cash flow was a disappointing negative $8 million, largely because of EDS's lax management of its accounts receivable.

EDS signed seven deals worth more than $100 million in the quarter, but no megadeals of $1 billion or more. EDS isn't losing out to the competition -- there just aren't many deals that big on the market at present, which may signal a general slowdown in IT spending.

From the conference call, it sounds like EDS will gear up its acquisitions -- perhaps another sign of an IT slowdown, as businesses gobble up smaller rivals to eke out additional growth. Look at Computer Sciences Corp. (NYSE: CSC  ) , which recently shelled out $1.3 billion for Covansys (Nasdaq: CVNS  ) .

EDS has undergone an amazing transformation over the past couple years, giving it the resources to carry out major acquisitions. All the same, a slowdown in the IT sector could weigh on the stock in the short run. In this case, it's probably best for Foolish investors to wait and see.

Further informative Foolishness:

Fool contributor Tom Taulli author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,695 out of 28,469 in CAPS.


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