AT&T; Agrees to Buy IBM’s Data Network

AT&T; Corp. agreed to buy IBM Corp.’s global communications network for $5 billion in cash, the companies said Tuesday, a deal that would allow the nation’s largest phone company to expand its worldwide business services.

The IBM network transports information and provides access to the Internet. The Armonk, N.Y.-based computer giant had been actively seeking a buyer for the unit and hired Merrill Lynch & Co. this fall to conduct a search.

The price AT&T; would pay exceeds most estimates of what the unit could fetch.

“The consensus was that it was worth between $3 [billion] and $4 billion,” said Megan Graham-Hackett, a computer hardware and networking analyst for S&P; Equity. Still, “even if the price was on the high side, it fits so perfectly for AT&T.;”

In addition to giving AT&T; a strong data-networking presence in the United States, the purchase would help fill gaps in AT&T;’s joint venture with British Telecom, which aims to peddle voice and data services to global companies. That venture was announced earlier this year.

IBM’s Global Network business serves about 35,000 corporate customers in 900 cities worldwide and provides Internet access to more than 1 million individual users in 59 countries.

“This helps to strengthen AT&T;’s weak link. AT&T; has really been behind companies like MCI WorldCom and Equant in having global data networks,” industry analyst Jeffrey Kagan said.

AT&T; edged out bidders such as SBC Communications Inc., GTE Corp. and Qwest Communications International Inc., analysts said.

AT&T; shares surged $2.25 to close at $67 and IBM advanced $1 to close at $168.19, both on the New York Stock Exchange.

Without the distraction of running the phone network, IBM hopes to concentrate on expanding its main computer and services businesses. It plans to use the $5 billion for research and development, acquisitions and to buy back shares.

“We can now focus fully on helping our customers take advantage of the emerging networked world,” IBM Chairman and Chief Executive Louis Gerstner said.

As part of the deal, IBM granted AT&T; a five-year, $5-billion contract to handle a large portion of IBM’s networking needs, while AT&T; has outsourced some of its applications processing and data management work to IBM.

IBM, the world’s largest computer maker, would handle jobs such as billing and installation for AT&T;’s business long-distance customers under an outsourcing contract valued at $4 billion over 10 years. It would also assume management of AT&T;’s data-processing centers, which operate corporate information systems such as employee payroll and benefits.

Under the agreements, more than 2,000 AT&T; management employees would be offered positions with IBM. About 5,000 IBM employees would join AT&T.;

The companies expect to complete the sale by mid-1999, after approval by federal regulators and authorities outside the U.S.

IBM said the deal will not have a significant effect on its 1999 operational results. AT&T; said any earnings dilution from the deal is expected to be insignificant in the first full year of operation but add to earnings thereafter.

AT&T; Chairman C. Michael Armstrong, who has boosted earnings by cutting more than 15,000 jobs, is expanding the data business to offset slower-growing phone services. IBM is shedding the expense of maintaining a telecommunications network to concentrate on managing other companies’ computer systems. Armstrong, who took over as AT&T; chairman last year, worked at IBM for 30 years, until 1992.

Armstrong “is doing the right thing,” said Ken McGee, a vice president at Gartner Group, a Stamford, Conn., research firm. “They had a lackluster performance in networking outside the United States.”

Since arriving at AT&T;, Armstrong has spearheaded several other major acquisitions, including the pending $32.7-billion purchase of cable giant Tele-Communications Inc., the partnership with British Telecom and ongoing talks with other cable companies.

The British Telecom move would strengthen AT&T;’s overseas standing, while the cable deals, together with AT&T;’s recent purchase of local phone company Teleport Communications Group, help clear a path for AT&T; in the local phone business.

“It was pretty easy for Mike to come in and see where the holes were and what needed to be bought to fill them,” McGee said. “But now he’s got so many [corporate] cultural issues in getting these companies to work together.”

They have to make it work, he said, “because if they don’t, I see them becoming another Bethlehem Steel--a company that used to be in the Dow Jones industrial average and isn’t anymore.”