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

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.