IBM's albatross, AT&T's treasure

The company has been trying to unload the unit--viewed as an albatross by many industry observers--since September, when it hired Merrill Lynch to shop the network around at an asking price of between $3 billion and $4 billion.

For an eyebrow-raising $5 billion, AT&T scooped up the Global Network unit yesterday--just one of a host of acquisitions the company has made since new chief executive C. Michael Armstrong took the helm at the company 13 months ago. When asked whether AT&T paid too much for the network, Armstrong, a 31-year veteran of IBM, said Gerstner "always drives a hard bargain."

But analysts say the No. 1 telecommunications giant needed the IBM network for a host of reasons. For one, AT&T Solutions, the company's services arm, expects IBM's network to provide sorely needed global capacity, as well as $2.5 billion in new revenue in the first year of operation. The network, used to provide services to companies, including building and managing their internal networks and Internet connections, is also expected to give the company the edge it needs to better compete against its chief rival, MCI WorldCom.

For AT&T, in the big picture, the purchase was just another present under the tree.

"AT&T is close to $120 billion in equity right now so a $5 billion deal isn't worth that much to them," said Timothy Horan, an analyst with CIBC Oppenheimer in New York. In recent weeks, the company has agreed to buy local phone company Teleport Communications Group for about $11 billion and cable television giant TCI for $48 billion.

The company has also announced an $11 billion alliance with British Telecom. Through that deal, AT&T had planned to spend as much as $5 billion on building a new IP network from the ground up. Now they won't have to. Since IBM's Global Network has a presence in 93 cities out of 100 cities where AT&T and BT had planned to build new networks, AT&T executives say they can instead funnel that money into network upgrades.

"It's not a bad strategy for AT&T," said Julie Giera, analyst at Giga Information Group, a Cambridge, Massachusetts-based consultancy. "They have the ability to upgrade that network and the expertise to support it."

Giera said network upgrades should take from six to twelve months. Transitioning client contracts and shuffling executives among organizations will likely prove a large challenge as well, said Tom Grace, analyst with AMR Research.

According to the terms of the deal, 5,000 IBM employees will join AT&T and more than 2,000 AT&T management employees will be offered jobs at IBM. No layoffs are expected.

Through the buy, analysts say IBM will finally be relieved of managing the far-flung network, which carries data for the country's largest corporations.

"Building and managing network services is not our core competency,'' Gerstner said yesterday at the press conference held to announce the deal.

"IBM has gotten rid of an albatross and can focus its business elsewhere," Giera said. "Certainly they won't be dumping money down the rat hole to fix that infrastructure anymore."

IBM built the network for its multinational customers during the 1980s out of necessity. Gerstner said the company did it because no telecom company at the time could, mainly due to international restrictions.

Under today's new regulatory environment, telephone companies and others have led the charge to build up their voice and data networks. Now, instead of maintaining its own network, IBM can lease network capacity from different vendors.

Plus, as part of yesterday's deal, IBM inked a $4 billion outsourcing contract with AT&T to provide billing, service-order processing, installation, and maintenance to AT&T's long distance customers.

In turn, AT&T Solutions landed a $5 billion, five-year outsourcing contract from IBM to run a portion of the company's internal applications.

"This is a deal that makes sense for both AT&T and IBM," said Forrester Research analyst Jim Freeze.