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EDS-MCI outsourcing deal on shaky ground

MCI-WorldCom and EDS's ten-year, billion-dollar contract could be on the rocks, bogged down by its extreme size and complexity and shadowed by the looming complications of a Sprint-MCI-WorldCom merger.

In February, MCI-WorldCom agreed to negotiate a ten-year, $5 billion to $7 billion contract under which services giant EDS would manage a major chunk of its computer applications and data systems.

Eight months later, analysts say the whopping contract could be on the rocks, bogged down by its extreme size and complexity and shadowed by the looming complications of a Sprint-MCI-WorldCom merger.

"The CEO has said there's a 50 percent chance [of the MCI-EDS contract making it]," said Legg Mason analyst Bill Loomis. "Don't be surprised if you see the contract not go through because of the mixed currents we're getting from the company."

The EDS-MCI mega deal--which also called for EDS to outsource the bulk of its voice and data communications services to MCI-WorldCom--is one of many billion-dollar outsourcing contracts between services companies and their customers that take months to hammer out as both sides try to settle on terms, pricing, services levels, and other details.

EDS spokesman Reed Byrum said the MCI-Sprint deal will have no impact on their current negotiations with MCI-WorldCom, which continued this week. While the company's attention is currently focused on MCI, it has a history with Sprint as well. In 1994, a proposed $30 billion merger between Sprint and EDS failed.

"We're continuing talks with MCI and those are going well," Byrum said. "We have done work in the past with Sprint and actually continue to do some work with Sprint right now."

Byrum said EDS and MCI-WorldCom hope to finalize the deal by the end of the year.

"The reason it's taking this long is because it's an awfully complex deal. That is typical of the mega deals that we negotiate," Byrum said.

But some analysts say more complications could be lurking as MCI-WorldCom inches toward an acquisition of No. 3 telecommunications company Sprint. If the two telecommunications behemoths unite, making their own computer systems work together will become a hulking project in itself--on top of any MCI outsourcing plan.

"Essentially, the EDS-MCI contract hasn't been finalized and now you have potentially a lot more complexity adding to it," said Gregory Gieber, a financial analyst at Brown Brothers Harriman.

Loomis said EDS has no idea this early in the game how the $129 billion MCI-WorldCom-Sprint merger will impact their deal. And the company probably won't know for some time, considering that the acquisition, the largest corporate merger ever, will be subject to intense scrutiny from the Federal Communications Commission.

Gieber said the larger outsourcing contracts are much more complex, as both companies must hammer out service levels, data interchange methods, personnel issues, and pricing matters.

While EDS has been optimistic about finalizing a deal by the end of the year, there's "obviously uncertainty," Gieber said.