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AT&T buys Big Blue unit for $5 billion

In a deal that has been rumored for months, AT&T says it will acquire IBM's Global Network unit, which provides business applications for networked firms.

AT&T is buying Big Blue's Global Network unit for $5 billion in cash.

In a deal that has been rumored for months, AT&T this morning announced it will acquire IBM's Global Network business, which provides business applications for networked companies.

The move is expected to bring AT&T $2.5 billion in revenue in the first 12 months--providing the company with sorely needed cash, particularly for its services arm, AT&T Solutions. About 5,000 IBM employees will join AT&T as part of the acquisition and 2,000 AT&T management employees will be offered jobs with IBM.

As reported earlier, AT&T has been in talks to acquire IBM's global networking unit since September.

"One of the things that confused me from the beginning is why IBM wanted to dump the crown jewel," said Jeff Kagan, president of Atlanta-based Kagan Telecom Associates.

But Wall Street analysts see the IBM network sale as a no-brainer, arguing that it gives the company the choice of leasing network capacity, while continuing to concentrate on the higher-value network services and hardware sales that IBM considers its core.

"Building and managing network services is not our core competency," IBM chief executive Lou Gerstner said at a press conference this morning. Now the company will focus on Internet technology services, applications, and "underlying technologies customers use to exploit the network," Gerstner said.

Jim Freeze, analyst at Forrester Research in Cambridge, Massachusetts, said the deal makes sense for IBM, as the company lacked the facilities and infrastructure to continue supporting the network in a competitive way.

"IBM came to the conclusion that they didn't need the network when there were plenty of players with billions of dollars invested in IP networks," Freeze said.

Analysts say the deal brings AT&T back in the race against MCI WorldCom and Equant Networking Services as a top global data network provider.

"I'd say they were behind MCI WorldCom and Equant before," Kagan said. "This gets them off the bench and back in the game."

The deal enables both companies to exchange their strengths.

Through the acquisition, the two companies will enter into outsourcing contracts with each other, with IBM providing part of its global network to AT&T and AT&T outsourcing some application processing and data center management operations to IBM. IBM will handle jobs such as billing and installation for AT&T's long distance customers. IBM will also assume management for AT&T's data processing centers, which operate corporate information systems such as employee payroll and benefits.

The $5 billion, five-year outsourcing contract with AT&T Solutions is the largest single contract ever awarded. IBM's Global Services unit, in return, will outsource services to AT&T valued at $4 billion over the next decade.

"These strategic agreements are all about growth," AT&T chief executive C. Michael Armstrong, a former IBM executive who was with the firm for 30 years, said in a statement. "Growth in revenue, growth in technology, and--most important--growth in what AT&T can do for customers."

Armstrong said the acquisition will enable AT&T to compete more effectively for global managed data service contracts with strong rivals. IBM's Global Network has more than 1,300 dial-up points of presence and dedicated access from more than 850 cities in 59 countries.

AT&T said this acquisition will also help it support its 100-city, IP-based network, which is planned as part of the global joint venture AT&T and British Telecom announced in July.

Shares of AT&T rose today to 65-1/4 on the Instinet electronic trading system, up from yesterday's close of 64-3/4. IBM's shares also rose, climbing to 168 from 167-3/16.

The companies said they expect to finish the acquisition by mid-1999, pending approval by U.S. regulators, as well as regulators abroad.

IBM said the transaction is not expected to have a significant impact on the company's 1999 operational results, while AT&T said earnings are expected to be insignificant in the first year.

Executives said no jobs will be lost as a result of the deal.

Reuters contributed to this report.