The estimated $1.8 billion a General Motors Corp. pension plan could receive from selling some of its EDS stock will be a bonanza for lucky money managers selected to reinvest the proceeds.
The amount is one of the biggest ever onetime pension fund inflows of cash from an investment sale.
The plan itself could reap an estimated 35% to 47% profit from the sale.
The profit will help keep up with the growing liabilities of the hourly plan. The plan was underfunded as of Dec. 31, despite the joint efforts of GM and the Pension Benefit Guaranty Corp., Washington, to boost the plan closer to fully funded status last year, using in part EDS stock.
The hourly plan could sell up to 34.5 million shares of its 149.5 million shares of Electronic Data Systems Corp. stock in a public offering, announced late June.
The pension plan is selling the stock to diversify its investments.
General Motors Investment Management Corp., New York, which oversees the investment management of GM's $74 billion of pension assets, intends to reinvest the proceeds from the EDS offering for the hourly plan, a spokesman said. GM pension officials declined to comment on the plan or how they will allocate the proceeds.
Officials at United States Trust Co. of New York, trustee for the hourly plan's special EDS trust, which is directing the sale, couldn't be reached.
"The offering is part of our continuing strategy to diversify the hourly plan's holdings in a manner that is prudent and consistent with maintaining an orderly market for EDS common stock," Charles E. Wert, head of U.S. Trust's Special Fiduciary Division, said in a statement.
Information was unavailable on whether GM's money managers are restricted from buying any EDS stock in the offering or on the open market.
The plan will continue after the sale to be the largest shareholder of EDS. Its ownership of EDS common stock will be trimmed to 24.6% or 23.7%, depending on whether 4.5 million shares in overallotments to the underwriters are exercised. Currently, the GM hourly plan owns 31% of the total 485.7 million shares of EDS stock outstanding.
The GM salaried plan owned 7.3 million EDS shares, or 1.5% of the outstanding shares as of last April. It is not involved in the offering.
Other than through its two pension funds, GM itself no longer has any stake in EDS. General Motors split off the computer company to shareholders of GM Class E stock, the EDS predecessor, June 7.
The hourly plan would make a 35% profit on the price appreciation, excluding dividends, of its EDS stock over the 16 months it has held it. At the time of the contribution, Class E was trading in the market around $39 a share, but GM reported an independent analysis valued the contributed EDS stock at $6.3 billion, or nearly $36.50 a share. EDS closed recently around $53 a share. The maximum offering price in the prospectus is $53.938 a share. Using the GM valuation, the profit from the sale would be 47%, excluding dividends.
By contrast, over roughly the same period, from March 1, 1995 through May 31, 1996, the Standard & Poor's 500 Stock Index produced an annualized compound return, including dividends reinvested, of 32.02%, according to Ibbotson Associates Inc. calculations.
After the sale, assuming the exercise of the overallotments and a $53 price, the hourly plan still would hold 115 million shares of EDS. The remaining holding would be worth about $6.1 billion, or about 16%, of the plan's total $38.6 billion.
Early last year, the GM hourly plan owned 190.1 million shares of GM Class E stock, including 173.2 million shares contributed by GM under an agreement with the PBGC in March 1995 and 16.9 million then already owned through purchases.
As part of the PBGC agreement, GM also contributed $4 billion of cash to its hourly plan, making the total contribution with the EDS stock some $10.4 billion.
Both contributions were designed to make the plan closer to fully funded status, although as of Dec. 31 the plan was underfunded by some $3.3 billion.
The GM hourly plan had $38.6 billion in assets as of Dec. 31 and accumulated liabilities of $41.9 billion. But GM reduced the unfunded gap significantly from $10.7 billion the previous year.
A spokeswoman for the PBGC said because of its agreement with GM "we have seen a dramatic improvement (in funding) in a short time" and it's (the GM hourly plan) no longer a prime concern of the agency.
The GM salaried plan had $30 billion in assets as of the same date and accumulated liabilities of $26.4 billion.
Later in March 1995, the hourly plan sold 40.5 million shares of Class E and the salaried plan sold 2 million shares of Class E in a public offering.
An agreement with EDS - designed to maintain orderly market trading of the stock - restricts sales by the GM hourly plan of its EDS shares.
It can make only two offerings per year, until its stake in EDS falls below 2%. It also cannot sell more than 2% of shares in any negotiated transaction. After this offering, the plan cannot sell any more shares for 90 days without the consent of the underwriters.
The prospectus estimates the expenses of the offering at $1.045 million, payable by EDS.
Of the offering, 25.5 million shares are being offered in United States and Canada and 4.5 million shares internationally.
The underwriters are Merrill Lynch & Co., Morgan Stanley & Co., Goldman Sachs & Co., Bear Stearns & Co., Lehman Brothers Inc. J.P. Morgan & Co., Salomon Brothers Inc. and Furman Selz Inc.
The hourly plan has proxy voting power, but the plan agreed to restrict until 1998 its vote on takeover or corporate control. It agreed to discourage, or make more difficult to establish, certain changes in control transactions, including tender offers, that could otherwise give holders of EDS the opportunity to realize a premium over the prevailing market price.