What EDS is hiding about its new CEO.

What EDS is hiding about its new CEO.

What EDS is hiding about its new CEO.

Moneybox
Commentary about business and finance.
March 25 2003 12:31 PM

Air Jordan

What EDS is hiding about its new CEO.

EDS shareholders expressed great relief last week when the Texas-based information-technology consulting giant cashiered CEO Richard Brown. A silver-tongued wheeler-dealer, Brown had repeatedly disappointed shareholders with poor earnings, unwarrantedly rosy projections, and a foolish bet on the company's own stock.

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Investors were likewise cheered that Brown's replacement was a seasoned executive with experience at solid old U.S. companies: Michael H. Jordan. A graduate of Yale and Princeton, he spent 10 years at McKinsey before joining Pepsi, where he rose to president and CEO of PepsiCo WorldWide Foods. In 1993, he joined Westinghouse and, foreshadowing the machinations of Jean-Marie Messier of Vivendi, turned the old industrial company into a New York media heavyweight. In what EDS's release called "one of the most comprehensive transformations in corporate history," Jordan, in the space of five years, sold off Westinghouse's electric and appliance businesses and bought CBS and radio giant Infinity Broadcasting.

The EDS release doesn't show Jordan to have any experience in the IT consulting field. But of course he does. In the late '90s, in fact, Jordan helped create an IT consulting firm, took it public, and served as chairman of its board for 21 months. The results were less than inspiring and may help explain why EDS was hesitant about touting it. EDS's omission is a sign, as if we need another one, of just how much investors have soured on anything connected to the tech bull market.

In 1998, Jordan decided to retire from CBS after losing a power struggle with his No. 2, CBS President Mel Karmazin. But before he formally left CBS, Jordan was already plotting his next move. Jordan and a friend, Guillermo Marmol, came up with an idea for combining two elements of the bull market: roll-ups and dot-com consulting.

Like the Backstreet Boys, roll-ups are a now-passé phenomenon popular in the late '90s. Roll-ups are companies formed to consolidate a fragmented industry—a whole bunch of bowling alleys, or office-supply franchises, or laundromats. Using publicly held stock as currency, roll-ups would buy out small owners, rapidly gain scale and market share, and show apparently supercharged growth. A rocket-fueled stock would be sure to follow.

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In 1998 and 1999, there were few better places to start a roll-up than in what used to be called the Internet consulting space. So Jordan and Marmol, who had also been a partner at (where else?) McKinsey, formed Luminant Technologies to snap up Internet professional-services businesses—corporate Web designers, Internet advertising agencies, firms that advised large companies on how to do business on the Internet. By integrating such diverse businesses, Luminant could swiftly grow into a dominant provider of one-stop shopping for Fortune 500 companies eager to mint money online. The savvy former consultants turned to the public for cash, raising more than $80 million in a September 1999 initial public offering.

Luminant makes a nice little case study in the misallocation of capital. When it completed the IPO, it bought eight businesses, including such obscure little shops as Free Range Media Inc. and InterActive8 Inc., for a total of $422 million, including $59.1 million in cash.

Based in Dallas, and with offices in technology consulting hotspots such as New York, Atlanta, San Francisco, Seattle, and Herndon, Va., Luminant took off. In the fourth quarter of 1999, the never-profitable company's stock rose to $52. But in 2000, as competition increased and demand slackened, things soured. In September 2000, Marmol resigned as CEO. In the fourth quarter of 2000, revenues fell 40 percent from the year before, and the company began reducing its headcount, which had risen to close to 1,000.

It was clear that Luminant couldn't turn a bunch of money-losing outfits into a single profitable corporation. And management controls were embarrassingly lax. In November 2000, Rodney Rothman, a former writer for David Letterman, penned an essay in TheNew Yorker titled "My Fake Job," a hilarious sendup of the goings-on at an anonymous New York dot-com. Rothman, unbidden, showed up to work for several weeks, got a desk, received massages, was listed in the company phone directory, and wrote nonsense diagrams on white boards. Cognoscenti quickly realized that the company at which he "worked" was Luminant. (Rothman's stock as a gonzo journalist quickly fell when it was revealed that his mother worked at the office in question, and that he had himself massaged certain elements of the story.)

Throughout the decline, Jordan served as chairman of the board. In May 2001, Jordan retired as chairman but remained on the board of directors. On Dec. 7, 2001, the company filed for Chapter 11. Lante Corp. then paid about $3 million for the company's assets.

Surely EDS knew about Jordan's role at Luminant. It's spelled out in SEC filings, and he was profiled in now-defunct New Economy magazines like the Industry Standard. Luminant was based in Dallas, near EDS headquarters in Plano. But there's no mention of Jordan's role at Luminant in the EDS release, or, for that matter, in any of the stories that appeared in the Wall Street Journal, New York Times, or on the wire services.

One can certainly understand EDS's omission. Luminant represented a brief period in Jordan's long and otherwise illustrious career. But in this climate, companies would be well-served to err on the side of broadcasting too much, rather than too little, information about their new CEOs—especially when the information omitted is directly relevant to the executive's current assignment. Luminant's story is sadly typical of the bust, and it sure doesn't inspire confidence that Jordan has what it takes to helm an IT consulting firm.