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EDS, MCI WorldCom ink $12.4 billion deal

The companies sign and finalize a $12.4 billion dual outsourcing deal that has been closely watched and criticized by analysts and industry observers.

Computer services giant EDS and MCI WorldCom today said they finalized a $12.4 billion outsourcing deal that has been scrutinized by analysts and industry observers.

In February, EDS and MCI WorldCom first announced plans to complete a joint computer services pact involving a swap of assets and employees estimated at $17 billion.

Today's agreement is one of several recent outsourcing megadeals forged among telecommunications and services giants as both sides try to shed some of their internal operations to make their businesses more competitive.

The deal mirrors parts of an agreement forged last 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.

Under the complex agreement, EDS said it would buy MCI WorldCom's Systemhouse information technology services unit for $1.65 billion, take on more than 12,000 MCI WorldCom employees, and exchange outsourcing agreements with MCI WorldCom.

Since then, EDS completed the purchase of MCI Systemhouse in April and gained about 9,000 MCI Systemhouse employees. However, the second half of the deal, the computer outsourcing agreement, was still under negotiations and attracting scrutiny from analysts who believed the deal to be on shaky ground. Analysts questioned whether the huge, complex contract was on the rocks, bogged down by its extreme size and complexity and shadowed by the looming complications of a Sprint-MCI WorldCom merger.

But, today, EDS and MCI WorldCom said the deal has been completed. Under the agreement, MCI WorldCom said it will outsource portions of its computer operations to EDS, a part of the deal valued at $6.4 billion. EDS said it will be responsible for computer systems at more than a dozen MCI WorldCom processing centers.

Analysts said the deal will help EDS beef up the commercial part of its business and help offset the $17 billion company's financial dependency on its former parent company. EDS was spun off from GM in 1996.

The news sent both companies' stock advancing. EDS shares closed at 52.62, up 2.44, while MCI closed at 74.56, up 0.94.

Although the contract sat in negotiations longer than expected, most issues and details should be ironed out now, said Gregory Gieber, a financial analyst at Brown Brothers Harriman.

In the second part of the deal, valued at $6 billion, EDS said it will outsource select parts of its global network operations to MCI WorldCom, which include network operations, management, and engineering. Both companies said the length of the agreements add up to 10 years, plus one start-up year.

Approximately 1,300 MCI WorldCom employees will transfer to EDS and about 1,000 EDS employees will transfer to MCI WorldCom, the companies said.

Reed Byrum, an EDS spokesman, said the outsourcing deal is set to begin today and the transfer of employees will proceed through next February.

While most were pessimistic about a deal being finalized, Gieber said outsourcing contracts this size merely take time to draw up and it benefits both EDS and MCI WorldCom to overcome the challenges and obstacles they may have faced to get to a signed agreement.

"It was just a matter of making sure they were explicit [with the details] and had all the checks in place so there wouldn't be any areas open for dispute," said Gieber. "When you have a company growing through acquisitions in the way WorldCom is, there are just a lot of details to work out."

He added, "There was more nervousness around this contract than there was warranted."