BT cautious as it flirts again in US

IF the stock market hawks are right, British Telecom is on the brink of a dollars 5bn acquisition in the US. The target: Electronic Data Systems, the computer firm founded by H Ross Perot, the recent presidential candidate, and now owned by General Motors. There is little doubt talks are in progress.

Investors are understandably excited at the prospect of such a deal. The omens look good. The British communications giant has ample financial resources, partly because it is about to receive pounds 1.1bn in cash from the sale of its stake in McCaw, a previous US investment, and partly because its gearing is almost embarrassingly low at under 20 per cent. It is, moreover, looking for opportunities for overseas expansion.

BT, as one executive puts it, has been 'romantically connected' with a string of potential partners over the last few years: MCI and IBM in the US; Stet in Italy; and, repeatedly, Logica in the UK. None is quite as good a match as EDS.

EDS specialises in integrating computer and communications systems for corporate customers. With a market value of around dollars 17bn it is believed to be one of the biggest computer services companies in the world. GM accounts for more than half of its business, but revenue from non-GM sources is expected to rise to 70 per cent by the middle of the decade.

As telecommunications companies seek to add ever more services to their networks, the skills of companies such as EDS in software and services are much sought-after. EDS also has the type of international customer base which would attract BT.

Outside its domestic market, BT's stated goal is to provide corporate customers with all their global communications needs. And while people in Britain might feel aggrieved at BT's ambitions on foreign shores instead of investing in the UK, BT's managers see things differently. In the search for growth, they believe they have little choice. Senior managers say expansion in the UK has become almost impossible because of steadily tightening regulation. Iain Vallance, BT's chairman, rails repeatedly against the actions of the watchdog, Oftel.

BT's beef is not just with the price cap imposed by Oftel on a growing number of its services, but demands such as that it should 'subsidise' less well-off customers with low-user schemes. Added to the regulatory problems in telecommunications are restrictions on BT's ability to expand as it wants into entertainment and other areas.

While the EDS deal would make good sense for BT, there is no guarantee it will go through. BT has become wary of US acquisitions, particularly after its much- publicised dollars 1.2bn investment in McCaw, a rising star of cellular radio, three years ago. With a 22 per cent stake, BT never had management control of the company. The relationship foundered and the UK giant agreed last year to sell its holding to AT&T for pounds 1.1bn. BT hailed it as an opportunity to realise shareholder value. In fact, it was a far cry from the return BT envisaged when it made the investment. So BT is determined to have proper control if it takes a stake in another overseas company - which could be a sticking point in talks.

As one UK analyst put it, the structure of EDS is 'curious'. When GM acquired it in 1984 from Mr Perot, the company issued Class E stock tied to the computer subsidiary's performance. Holders of these shares are entitled to dividends relating to EDS, but do not have a direct right to EDS assets, which are controlled by GM. The car maker, which has had severe problems over the past two years, may well be keen to make money by finding a partner in EDS, but would not appear enthusiastic about relinquishing any control.

Laurence Heyworth, an analyst with Robert Fleming Securities, said: 'While a link between BT and EDS has considerable attractions, there would be practical difficulties on the questions of control and of an ongoing relationship with GM.'

For its part, BT is not waiting idly for the right partner. It has already established its Global Network Services business based in the US, and a sister organisation, Syncordia, to provide sophisticated communications services to international business customers. The third and final leg - on which BT will not comment - is the secretive Project Cyclone, which would provide a springboard for the future growth of both GNS and Syncordia.

And so the marriage bureau enthusiasts come up with potential partner after partner for BT. But the drive with which the company pursues organic growth could be BT's own admission that the right one may never come along.

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