A young Texan named H. Ross Perot has pulled off perhaps the most spectacular personal coup in the history of American business. Probably no other man ever made so much money so fast. A little more than six years ago, Perot was a disgruntled I.B.M. salesman with a few thousand dollars in the bank and an urge to start his own computer-software business. He did, and now, in the wake of a public stock offering last September, he has a $300-million stake in his company, Electronic Data Systems Corp., based in Dallas. At thirty-eight, Perot, who is chairman and president of the company, already is one of the richest Texans, ranking just behind three oilmen—H. L. Hunt, N. Bunker Hunt, and R. E. Smith. In fact, there may be fewer than a score of individuals in the U.S. richer than Perot.
As all this suggests, Perot and his company have been remarkably successful in selling their computer know-how. Electronic Data Systems' revenues have about doubled every year since 1964, and they are expected to double again in the fiscal year ending next June 30. However, most of Perot's wealth can be attributed to the enthusiasm of investors. As every ladies' investing club knows, the public these days is wildly receptive to new stock issues, particularly from companies involved in the computer industry. And the reception accorded E.D.S. has been as wild as any. In early October the stock was selling at well over 200 times its earnings for the 1968 fiscal year; during that year the company had net income of only $1,558,100, on revenues of only $7,706,800.
By those measurements, E.D.S. is just a pip-squeak. But in one respect it already compares impressively with some giant corporations. The total market value of its outstanding shares in early October was about $375 million—Perot owns 81 percent of the stock—and that was greater than the market values of Swift & Co., Grumman Aircraft, and the AMK Corp., all of them high on this year's FORTUNE list of the 500 largest industrials. The people who are buying E.D.S. stock obviously don't expect the company to remain a pip-squeak very long.
They may have a case. Some securities analysts have suggested that E.D.S. might be doing $100 million worth of business annually by 1972. That may seem like an ambitious goal—it would represent a thirteenfold increase in just four years—but the company's brief history suggests that ambitious goals are within its grasp. During the first five months of its existence E.D.S. had just two employees—Perot and his secretary. Today there are well over three hundred employees, the company occupies two floors of a large Dallas office building, and there are branch offices in seven other cities.
Much of this growth was inevitable, a natural result of the computer boom. But Perot's admirers, including many Wall Street analysts, insist that E.D.S. is more than just another software company. They contend that it has been able to recruit perhaps the most skillful staff of systems engineers in the country (the company has nineteen full-time recruiters, or about eighteen more than most software companies that size). They point out that E.D.S. has a reputation for accomplishing its tasks thoroughly and brilliantly, and that it has developed an unusual, and highly profitable, modus operandi.
In effect, E.D.S. becomes a customer's data-processing department. E.D.S. furnishes the computer, programs it, and operates it; E.D.S. employees work full time on the customer's premises for the life of the contract. The customer's employees need only be taught how to prepare their records and how to make good use of the material disgorged by the computer. E.D.S. confines itself to long-term contracts—the standard length being five years. The contract itself is a thick volume, in which E.D.S. explains precisely what it will do, and fixes the cost (there may be additional charges based on the amount of work). The customer normally finds a long-term contract attractive because it permits him to judge his costs well in advance; the cost of data processing has been rising rapidly in recent years. Meanwhile, E.D.S. is able to avoid a cost-price squeeze by removing some of its personnel from a project after things begin running smoothly, and reassigning them to new projects. In fact, the company has been so adept at avoiding a squeeze that its pretax profit margin was more than 30 percent during fiscal 1968, and on some contracts the margin was as high as 50 percent.
"On Wall Street everybody talks"
E.D.S. stock was first offered to the public at a mere 118 times earnings—which nonetheless was very nearly a record multiple for a new issue. Perot had a large role in the underwriting, devoting his full attention to it for nine months. He says he entered the project with an "uncluttered mind"—which means, he confides, that he had no idea what he was doing. But he proved a rapid learner, and when the shares finally hit the market he emerged looking as smart as any Wall Street investment banker.
Perot says he first became seriously interested in going public last December, after a chance conversation with one of his computer operators. The operator, who owned some shares in the company, tactfully suggested that he'd like to know what they were worth. Perot had been reluctant to go public because he liked the advantages a private company enjoys over publicly held competitors, and because he was afraid that some of his employees might become euphoric with their paper profits and slack off. (He now says this hasn't happened.) Perot summoned a meeting of the other stockholders—all of them employees—and found a majority in favor of an offering.
A friend of Perot's at the Dallas office of Goodbody & Co.—a major brokerage house—had been urging him to go public, so the next time they met Perot acknowledged that he was willing. Word quickly spread through Wall Street. "In our business, we don't tell our competitors anything," Perot muses, "but on Wall Street everybody seems to talk to everybody else."' Since computer-software companies were much in vogue, a host of investment bankers began streaming into Dallas. Most of them were impressed with what they saw, and by the time the procession ended, Perot had received bids from seventeen firms anxious to be the chief underwriter.
At the outset, Perot supposed that the experts had some easy formula for fixing the price of a new stock issue. But the wide variation among the bids made him wonder. One firm offered to bring the stock out at thirty times earnings, and most of the other bids ranged between sixty and ninety times earnings. "It was just like the livestock market," says Perot, whose late father was a cattle and horse trader in east Texas. "You need a willing seller and a willing buyer." Perot kept the bidders at bay while he plunged through the prospectuses of twenty-five or thirty publicly held companies in the computer industry. He discovered that many of them had indeed come out at thirty to ninety times earnings, and had proceeded to double or triple in price their first day on the market. "Those companies suffered an irrecoverable loss by offering too low," Perot remarks. He decided to aim higher.
A word with Charlie Allen
In late February, R. W. Pressprich & Co., a small investment-banking firm based in lower Manhattan, offered to bring the issue out at more than a hundred times earnings, the highest price yet. Perot had never heard of Pressprich, and in fact he called a friend at the Republic National Bank of Dallas to make sure the firm was reputable. Assured that it was, he talked the matter over with Kenneth Langone, executive vice president of Pressprich. Perot warned Langone that Pressprich had bid considerably more than any other firm, and offered him the chance to come down. Langone replied, "That's our deal." Three other firms that had submitted lower bids quickly came forward and matched Pressprich. But Perot was much taken with Langone and with Pressprich, particularly by its refusal to lower its bid when it had the opportunity. He accepted the Pressprich offer.
While he is delighted at the way Pressprich handled the underwriting, Perot recently said he regretted not being able to make a deal with Charles Allen, founder of Allen & Co., Wall Street's most successful venture-capital firm. (See "Charlie Allen: A Feel for Stocks," Fortune, May 1954.) Allen came down to Dallas to see Perot, and Perot was mightily impressed. Although scarcely an expert on Wall Street, Perot had heard a lot about Allen; he knew him to be extremely rich and an extremely shrewd businessman. "He has the style of the great cattle traders," says Perot. Allen did not match the Pressprich bid, however, and Perot, for all his admiration, had to turn Allen down. Today Perot is richer than Allen.
After agreeing to go public, Perot suggested that the public be given a ninety-day money-back guarantee—a unique notion that the underwriters hastily rejected. Anyway, a money-back guarantee would apply only if the price were to fall, and Perot considered it more likely that it would rise instead. He was obsessed with the thought of that "irrecoverable loss" he would suffer on the first day of trading.
His solution was to offer only a small fraction of his shares, just enough to create an "orderly market." An orderly market is one in which the supply of stock is sufficient to keep the price moving smoothly, rather than leaping wildly from trade to trade. Most companies prefer an orderly market so their stock will be a reliable instrument for raising new money or buying other companies. Perot was advised that it would take more than 500,000 shares to make an orderly market; since he didn't want the shares to represent a sizable portion of his holdings, he had the company recapitalized with the unusually large total of 11,474,364 shares. He then placed 325,000 of his own shares—less than 4 percent of his holdings—on the block, while E.D.S. itself issued 325,000 new shares for sale to the public. The offering was so small that the forty-four underwriters received a total of only $695,500 in commissions, and only $208,650 of that went to Pressprich, the chief underwriter. Perot sweetened the deal for Pressprich, however. To assure wide distribution of the stock, he had forbidden the underwriters to sell more than 200 shares to any individual or institution, but he had E.D.S. issue 20,000 new shares for direct sale to Pressprich at the offering price—$16.50 a share.
As Perot had expected, the price zoomed after the offering—from $16.50 to $23 at the close of the first day, September 12. By releasing only a minimal number of shares, Perot was able to limit his "irrecoverable loss" to $2,100,000—the $6.50 price gain multiplied by the 325,000 shares. Since he kept 9,327,000 shares for himself, and 10,160 for his wife, the loss was scarcely noticed. The shares he retained rose by more than $60 million that first day, and they have continued to gain; the stock, which is traded over the counter, was quoted at $33 during the first week of October.
The company's other employees no longer can complain that they don't know what they're worth. In fact, it would be surprising to hear them complain at all. The employees recently held close to 1,500,000 shares, almost $50 million worth, and many of those shares were purchased from Perot earlier this year at 20 cents a share, the company's book value at the time. Several of the top executives are multimillionaires now, and some of the lower-rank employees, including computer programmers in their twenties, are worth six figures.
Thinking subversive thoughts
The origins of this incredible bonanza go back to the day in early 1962 when International Business Machines Corp. decided that Perot, one of its Dallas salesmen, was earning too much money. As Perot recalls it, I.B.M. wanted to spread its commissions as evenly as possible among the salesmen, preferring not to let any individual make an inordinate amount. In 1962, Perot, who had joined the company in 1957, sold his year's quota of computers by mid-January. He then was kept in the office, where he found little to do but think subversive thoughts about his employer.
One of those thoughts provided the spark for E.D.S. Perot decided that while I.B.M. might be excellent at making and installing computers, it was unconcerned about showing customers how to use them. "We were getting the hardware into place," he recalls, "but the customers weren't really getting what they wanted. They would hire a staff, and then proceed by trial and error. It was comparable to getting steel and concrete for a building before buying the lot." Perot assumed there must be a sizable demand for a company that could bring in experts to design, install, and operate a data-processing system, eliminating the need for the customer to do much more than pay the fee. He began seriously to consider building such a company.
Meanwhile, I.B.M. offered Perot an administrative job in White Plains, New York. But while skimming through a magazine, he encountered a famous passage from Walden: "The mass of men lead lives of quiet desperation." The passage had a traumatic effect on Perot. He left I.B.M., and on June 27, 1962, his thirty-second birthday, incorporated Electronic Data Systems.
Digging into his savings, Perot bought, at wholesale rates, some unused time on a computer owned by the Southwestern Life Insurance Co., a Dallas concern. He then traveled through the East and Midwest in search of companies that would buy the time from him at retail rates. He finally made a sale to the Cedar Rapids, Iowa, branch of Collins Radio Co. Collins Radio sent planeloads of experts and computer tapes to Dallas. This was not precisely the sort of business Perot had been planning during his idle moments at I.B.M., but he needed the money to get going. He has a phobia about borrowing, and in fact the company didn't borrow a cent until last February, when it floated an $8-million loan from the Republic National Bank to buy some computers it had been leasing.
The Collins Radio deal gave Perot enough money to support a small staff. In November, 1962, he took on two salesmen, Milledge A. Hart III and Thomas J. Marquez, both the sons of east Texas cattle traders, and both employees of I.B.M. in Dallas. Perot also hired an I.B.M. systems engineer, J. N. Cole. All are now vice presidents and members of the board of directors. Perot found I.B.M. a fruitful breeding ground, and as E.D.S. grew he hired away many I.B.M. employees. The contacts he made while selling for I.B.M. also proved valuable. At I.B.M. he had specialized in insurance companies, and today much of E.D.S.'s revenues come from insurance companies in the Dallas area.
While E.D.S. has grown rapidly, it still is in a precarious position. At present, it has only a few customers, and three of them accounted for a total of 64 percent of revenues during fiscal 1968. The present customers might not renew their contracts, or they might insist on less comprehensive contracts if they do renew. The E.D.S. executives do not seem much concerned, however. "I don't think we will run out of new customer prospects for the next hundred years," says Milledge Hart.
E.D.S. may never run out of prospects if a remarkable new product it has developed lives up to expectations. The product is a computer terminal, powered by batteries, which can make contact with a computer through any telephone. What makes the terminal so special is that it is compact and portable: it weighs less than five pounds and is about the size of the Manhattan telephone book. The user will place the telephone headset in a receptacle built into the terminal, push a button linking him to the computer, and punch his message on a keyboard, also built into the terminal. The keys will transmit coded tones to the computer, which will be programmed to respond with a human voice, audible through a speaker in the terminal. The terminal was invented, primarily during off hours, by an E.D.S. employee, Earl Spraker. Perot plans to rent the terminals at $20 a month each. He says he expects a good response from, among other prospects, large corporations whose salesmen need ready access to inventory figures. E.D.S. will have another company manufacture the terminal at first, but may eventually do the job itself.
Ahorse with the "Gazette"
Henry Ross Perot was born on June 27, 1930, in Texarkana, Texas. He attended the public schools there, and took a two-year pre-law course at Texarkana Junior College. But his most stimulating educational experience came from watching his father, Gabriel Ross Perot, transact business. "A farmer would drive up to our place, knock on the door, and tell my daddy, 'Gabe, I've got that horse you always wanted.' No matter how much he wanted the horse, Daddy would reply, 'What horse?' The fella would have brought his horse twenty-five miles, and he didn't want to go home yet. 'How much do you want?' my daddy would ask. 'Three hundred dollars,' the farmer would say. 'Don't believe I want him.' 'Dammit, Gabe, aren't you going to look at him?' He'd go outside, make some elaborate compliments about the animal, but say he didn't want to buy it. A few days later they'd settle for $225, and everybody was happy." Perot says his confrontation with Charles Allen brought back nostalgic memories of those days.
Perot enjoyed selling, and did a lot of it himself as a boy—Christmas cards, saddles, the Saturday Evening Post, and the Texarkana Gazette. He established the newspaper route himself, in a section of town inhabited by Negroes and poor whites. It was an area that the newspaper hadn't considered worth cultivating. Perot traveled twenty miles a day on horseback to deliver the papers, and because he had started the route, he received 70 percent of the price instead of the customary 30 percent. When the route began to thrive, the newspaper tried to reverse the ratio, but Perot argued them out of it.
Perot found his pre-law college course neither difficult nor interesting. He was really biding his time until he could be admitted to the U.S. Naval Academy; three older friends whom he idolized had gone there. Perot was sworn into the academy in 1949, on his nineteenth birthday. While a midshipman, he had a blind date with Margot Birmingham, a Greensburg, Pennsylvania, girl who was attending Goucher College. They were married in September, 1956.
After being commissioned in 1953, Perot boarded the destroyer Sigourney en route to active duty in Korea. The ship was docked at Midway Island when news of the truce arrived. The jubilant crew called at Hong Kong, Ceylon, Suez, and several European ports before returning to the U.S. During the voyage Perot collected samples of coins from each of the countries he visited; the money now is mounted, framed, and displayed under glass at his office.
Ensign Perot's next duty was aboard the U.S.S. Leyte, an aircraft carrier, as assistant navigator. A collateral duty was taking care of any V.I.P. guests who happened to be aboard. One such guest, an I.B.M. executive, was impressed enough to suggest that Perot have an interview with the company. At the time, Perot thought I.B.M. manufactured only typewriters. After his tour of duty ended, he joined I.B.M. in Dallas.
Perot insists that success won't spoil him. He lives comfortably, though not regally, and he has no plans to alter his living habits. Perot, his wife, their four children, and two immense golden retrievers occupy a four-bedroom house in Greenway Parks, one of the more sumptuous parts of Dallas. They have three cars—a 1965 Lincoln, a 1968 Plymouth station wagon, and a 1959 Ford. The family has a second house on one of the man-made lakes near Dallas, and they keep about a half-dozen modest boats, ranging from a canoe to a secondhand powercraft. While the sale of his 325,000 shares gave him $5 million in cash to play with, Perot plans to plow most of it back into the business, at least indirectly. He will make major investments in companies just starting out in the computer-software business, and if the companies flourish he will sell his shares to E.D.S. at cost.
Some of his cash will go into the newly organized Perot Foundation, and his will makes the foundation the beneficiary of his entire stake in E.D.S. Among the projects he contemplates for the foundation is a detailed study of a Dallas Negro ghetto, with a view toward improving the conditions there. Perot makes loans to Negro businessmen, and also has a plan to distribute used clothing to poor Negroes. "Making all this money is partly an accident," he explains. "I could have put the same amount of energy into a corporation that made steel forgings, but I would have been in the wrong place at the wrong time. I had the opportunity to be in the right place, and I have an obligation to do something creative."
This article originally appeared in the November 1968 issue of Fortune magazine.