AT&T to buy IBM's global data system Acquirer sees 'a new platform for revenue growth'

Pair in other agreements

Outsourcing goes both ways in series of deals

Information technology

December 09, 1998|By Mark Ribbing | Mark Ribbing,SUN STAFF

AT&T Corp. and International Business Machines Corp., two giants of the information technology industry, announced a multi-billion-dollar series of agreements yesterday to swap some key operations.

In a move seen as a bid to enhance New York-based AT&T's standing in the international and Internet markets, AT&T will buy IBM's global network business for $5 billion in cash. That move comes as companies such as MCI WorldCom Inc. continue to aggressively build their own worldwide networks.

That thrust by AT&T would complement the company's joint venture with British Telecommunications PLC to develop an international network.

At a Manhattan news conference announcing the transactions, AT&T Chairman and Chief Executive Officer C. Michael Armstrong, who worked at IBM for 31 years, said the acquisition "will give us a new platform for revenue growth. It will make us more competitive with some very strong rivals out there."

In addition to the global network sale, the companies agreed to hire each other for certain key business functions that they had formerly handled themselves.

IBM will outsource a major chunk of its internal networking needs to AT&T, an agreement that itself will be worth $5 billion to AT&T over five years.

AT&T, for its part, will pay IBM $4 billion over 10 years to take over some of AT&T's data processing operations, such as payroll and benefit records of AT&T employees, and billing and service orders for AT&T's corporate long-distance telephone customers.

As a result of the global network acquisition, 5,000 IBM employees will join AT&T. In order to perform the outsourcing, more than 2,000 AT&T employees will switch to IBM.

"A lot of badges are going to change here," IBM Chairman and Chief Executive Officer Louis V. Gerstner Jr. said yesterday.

Executives of the two companies said no jobs would be lost as a result of the agreements, and that, because both firms have nationwide operations, few employees will have to relocate.

Spokesmen for AT&T and IBM said very few Maryland employees, if any, will be part of the worker exchange.

AT&T and IBM said they undertook the deals to allow each company to focus on its areas of expertise.

While AT&T gets to broaden its data and international networks by acquiring a network serving thousands of businesses and more than a million individual Internet users in 59 countries, Armonk, N.Y.-based IBM has a chance to strengthen its core computer and information technology services.

IBM was compelled to set up its own international communications network in the 1970s and 1980s in order to serve itself and its customers, including telecommunications firms constrained by regulatory and technical limitations.

Gerstner said the legislative and technological changes that have reshaped telecommunications in this decade have allowed the company to jettison its network and rely on others.

"Building and managing these physical networks is not our core competency," he said. Analysts applauded the multipart transaction. "This is a terrific deal for both IBM and AT&T," said Jim Freeze of Forrester Research Inc. in Cambridge, Mass.

"AT&T has clearly made a decision that it needs to be a global data communications provider. This gets them in the game," Freeze said.

"Their reach internationally has been anemic, to say the least," Freeze added. "They needed this."

Melanie Posey, an analyst at International Data Corp. in New York, said that for IBM, "It's more profitable to perform the value-added applications that run on data networks than to run the networks themselves."

The stocks of both companies rose in yesterday's trading. AT&T gained $2.25 to close at $67, while IBM moved up a dollar, finishing at $168.1875.

The companies expect the global networks acquisition to close by the middle of next year. The purchase is subject to the approval of American and foreign regulators.

IBM's Gerstner said AT&T had bought the networks business in "a formal auction" and then proposed to IBM that the two firms enter the outsourcing agreements.

He declined to identify the companies that AT&T outbid. He said, This agreement is not exclusive and we will continue to work with other telecommunications companies around the world."

Pub Date: 12/09/98

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