Under the complex agreement, EDS will buy MCI WorldCom's Systemhouse information technology services unit for $1.65 billion, take on more than 12,000 MCI WorldCom employees, and the companies will exchange outsourcing agreements.
Plano, Texas-based EDS, the world's second largest computer services company, will outsource the bulk of its voice and data communications services to MCI WorldCom, in a deal valued at $6 billion to $8.5 billion over 10 years.
As previously reported, MCI WorldCom had been trying to negotiate a sale of Systemhouse to focus its efforts solely on its rocketing telecommunications business.
Now, Jackson, Mississippi-based MCI WorldCom, the No. 2 U.S. long distance company, will farm out major portions of its computer applications development and maintenance services and virtually all of its infrastructure services to EDS in a 10-year agreement valued at between $5 billion and $7 billion.
Financial analysts say that by outsourcing its voice and data network needs to MCI WorldCom, EDS should save 10 percent or $50 million in the first year. While neutral earnings from the deal are expected in 1999, a turn-around should benefit EDS's long-term bottom line.
"EDS's intention here is to build up the commercial part of the business to offset the GM part of the business, which is a big drag," Merrill Lynch analyst Stephen McClellan said. More than a quarter of the company's $17 billion in annual revenue comes from a long-term contract to manage data processing for former parent company GM. EDS was spun off from GM in 1996.
Jim Freeze, analyst at Forrester Research, said the deal benefits both partners.
"Systemhouse was a wasting asset that [MCI WorldCom] was doing nothing with," he said.
Systemhouse's revenue last year rose to $1.7 billion, from $1 billion in 1994. While the division has been profitable, its services are limited and the company hasn't been able to compete for larger contracts against larger rivals.
Both sides benefit
MCI WorldCom Vice Chairman John Sidgmore said the company rejected offers for Canada-based Systemhouse from other suitors and had sat down with a few of the larger systems integrators before picking EDS.
"We did get an awful lot of calls--most that were rejected," he said. "The instant we talked about it [with EDS] we knew we both liked the deal."
Under heavy pressure from Wall Street, WorldCom chief executive officer Bernard Ebbers has pledged to cut costs at the company by $2.5 billion this year. Analysts see MCI's sale of Systemhouse as a way to help MCI do that by enabling the company to shift its full attention to its core competencies. By handing data and voice networking needs for itself and its customers to MCI WorldCom, EDS can do the same.
The acquisition of Systemhouse won't immediately change EDS's overall profit margins, said McClellan.
"[EDS] knew what condition [Systemhouse] was in before they bought it," he said. "It had a very lackluster record so they got it for a cheap price."
But the deal involves more than just Systemhouse. Freeze said MCI WorldCom needs EDS to help them sort out systems integration challenges posed by 60 acquisitions the company has made over the past four years, including four large deals in the past year.
"They've got huge back-end integration challenges and EDS can help them there," he said.
After WorldCom acquired MCI, the networks and two companies' sales forces were merged immediately, Sidgmore said. Merging systems and information technology under various acquisitions is the larger challenge, he said.
Changing the landscape
This deal mirrors aspects of an agreement forged in December between AT&T, the No.1 U.S. long distance company, and IBM, the world's largest computer services company. In the AT&T/IBM deal, AT&T agreed to buy IBM's global communications network and the two companies agreed to contract services to each other worth about $9 billion.
Ebbers said the company had no interest in cutting a deal with IBM Global.
EDS CEO Dick Brown said the EDS/MCI and IBM/AT&T deals are not the same.
"This is entirely different," he said. "We're taking traffic that emanates from our clients--data and commercial traffic--and pushing it across the MCI global network. We didn't sell a retail network as IBM did to AT&T."
George Logemann, analyst with Boston-based Yankee Group, said the deal shifts the landscape within the competitive services market.
"It has an impact on CSC [Computer Sciences] and the second tier--that's clear," he said. "Now what we have is the two largest companies [EDS and IBM] both saying, 'you buy IT services from me and network services from my partner and together we will make you successful.' Nobody else in the business can tell that story."
EDS expects to transfer about 9,000 Systemhouse employees by April. Another 3,000 MCI workers are expected to move to EDS several months later as part of the outsourcing contract.
About 1,000 EDS employees are expected to be offered jobs at MCI WorldCom.
Brown said he could not say whether there will be layoffs, though he expects overlaps in staff and infrastructure.
"We have a team looking at this," he said. "I can never say there won't be a layoff, but that's not the attitude we have going into this."
Reuters contributed to this report.