The professional services giant on Thursday agreed to acquire Sabre's technology outsourcing division in a broad deal worth $670 million, as EDS attempts to expand its reach to provide consulting and computer services to the vast travel industry.
With the acquisition, Plano, Texas-based EDS said it plans to combine Sabre's software products and travel marketing and distribution expertise with its core capabilities in systems integration. Sabre, based in Dallas, runs one of the largest computer-based reservation systems for travel agents.
Also as part of the agreement, EDS, which has enjoyed a recent winning streak, said it has signed a 10-year outsourcing contract worth $2.2 billion to manage Sabre's computer systems. EDS will provide Sabre with outsourcing services including data-center management, applications hosting and network management.
"It's a big win for us," EDS Chief Executive Dick Brown said in a conference call with analysts and the press. "We've been at this many months."
Investors seemed to take a shine to the deal as well. In early trading Thursday, Sabre's shares were up $4.65 to $40.95, a jump of about 13 percent. EDS moved up less dramatically, rising $1.19, or about 2 percent, to $57.94.
In the transaction, EDS is purchasing Sabre's airline outsourcing assets, resources and contracts, including its outsourcing deals with major carriers such as American Airlines and US Airways for $670 million. Other assets that EDS is buying include Sabre's data centers and desktop and midrange computer management systems.
The American Airlines and US Airways contracts account for $600 million in annual revenue, according to Sabre. AMR, the parent company of American Airlines, spun off Sabre in 1999.
Sabre said it intends to retain its core travel marketing and distribution business, including intellectual property and assets. Other businesses Sabre will retain include its applications software products suite, software intellectual property and reservations-hosting business, which were part of the company's Outsourcing and Software Solutions business unit.
EDS, which provides services to clients in several industries including financial services, technology and retail, said business from its transportation practice makes up about 5 percent of the company's overall revenue.
"With the consolidations (occurring) within the transportation industry, we see a significant need for this type of IT services in the competitive environment, even with the economic slowdown," said Jim Dellum, president of EDS' global transportation industry practice. "We think this is a significant growth opportunity."
EDS said it expects the acquisition to be neutral to its earnings per share in 2001 and to add to earnings thereafter. The company, which competes against Computer Sciences, IBM Global Services and others in the consulting and services market, said roughly 4,200 Sabre employees are expected to join EDS upon closing of the deal.
Assuming the transaction closes as scheduled, EDS expects to gain an additional $150 million in revenue per quarter representing a nearly 20 percent growth rate, EDS executives said in the conference call. The transaction, which is subject to customary government approvals, is slated to close in the middle of this year.
Though many other players have been stumbling in the challenging consulting and services sector, EDS continues to trumpet new partnerships and contract signings.
The 10-year contract with Sabre is one of several new computer-outsourcing deals EDS has nabbed in recent weeks, most of them long-term deals with multimillion-dollar price tags. Several financial analysts recently issued positive reports, rewarding EDS with healthy projections after the company held an analyst meeting with Wall Street where it boasted recent contract wins and gave an upbeat earnings outlook.
EDS and Sabre said they plan to collaborate in marketing efforts. Both companies will jointly market Sabre's family of airline software products coupled with EDS' consulting services and systems-integration capabilities.
As part of the joint agreement, EDS also will contribute approximately $20 million over the next two years for product development in Sabre's software business primarily to evolve its airline software suite to an ASP (application service provider) model. ASPs host applications that customers can access from any desktop, typically for a monthly fee. EDS said it expects to profit from the investment through a revenue-sharing agreement with Sabre.