US Report: AT&T buys IBM networking unit for $5 billion

Summary: AT&T Corp. said Tuesday it will acquire IBM's global network business for $5 bn (£3bn) cash. The move could boost AT&T's revenue by $2.5 bn (£1.5bn) in its first year of operation, the company said.

Shares of AT&T rose 1 to 64 3/4 and Big Blue added 9/16 to 167 3/4 in the light of morning trading.

International Business Machines and AT&T also entered outsourcing agreements. IBM has awarded AT&T Solutions an outsourcing contract valued at $5 bn (£3bn) over five years to run a significant portion of IBM's network.

AT&T (chart) awarded IBM's global services unit a 10-year, $4 bn (£2.4bn) outsourcing contract to manage AT&T's legacy applications, including billing, installation and other services, and data processing centres.

IBM (financials) said the transaction won't have a significant impact on its 1999 operational results. IBM is expected to earn $2.45 a share in the fourth quarter and $6.55 a share for the year. For 1999, analysts are projecting IBM earnings of $7.52 a share.

AT&T (financials ) said earnings dilution from the transaction is expected to be insignificant in the first full year of operation and accretive after. According to First Call, Wall Street is expecting AT&T to report earnings of $3.35 a share for 1999 once its merger with Tele-Communications.

Through the IBM networking business, AT&T gains access to large global companies, mid-sized businesses and more than 1 million individual Internet users in 59 countries. About 5,000 IBM employees will join AT&T. Through the outsourcing deals, more than 2,000 AT&T employees will be offered positions at IBM.

AT&T said the acquisition is part of the company's strategy to focus on networking services, one of its fastest growing businesses. "These strategic agreements are all about growth," said AT&T CEO C. Michael Armstrong, in a statement. "The acquisition of IBM's global data network will accelerate our ability to deliver IP-based services to global customers. It will give us a sophisticated new platform for revenue growth."

Analysts gave the deal an early thumbs up. "AT&T has been behind the eight ball in a few areas and they are trying to allocate resources into growth areas, such as data and the Internet," said Alan Feldman, analyst at Sands Brothers & Co. "In one fell swoop AT&T has doubled its Internet presence."

AT&T said its acquisition of IBM's high capacity network would support the 100-city, IP-based network that would be created as part of the global joint venture announced by AT&T and BT in July.

IBM said the sale of its global networking unit will allow Big Blue to focus on its e-commerce applications.

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. The companies said they expect the acquisition to conclude by mid-1999.

Eric C. Fleming contributed to this report.

Topics: Networking

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Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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