AT&T to buy IBM Network for $5 billion

By Rebecca Sykes and Kristi Essick
IDG News Service, 12/08/98

Ending months of speculation about which suitor would step up to buy IBM's Global Network business, AT&T announced today that it will acquire the division for $5 billion in cash.

The deal also entails the two companies entering into outsourcing contracts with each other. IBM will outsource a large portion of its global networking needs to AT&T under a contract valued at $5 billion, while the U.S. telecommunications giant will outsource certain applications processing and data center management functions to IBM in a separate $4 billion deal.

Meanwhile, industry observers applauded the deal and said it will give AT&T a big boost internationally.

AT&T is counting on the acquisition to bring $2.5 billion in additional revenue in the first full year of operation and to accelerate its ability to offer IP-based managed network services to global customers, according to Mike Armstrong, AT&T's chairman and CEO. IBM's network will complement AT&T's existing plans to build a 100-city IP-based network as part of its global joint venture announced with British Telecommunications PLC, Armstrong said at a press conference this morning in New York.

"Acquiring IBM's global data network will give us a new platform for growth and accelerate our ability to deliver IP to customers," Armstrong said.

The IBM Global Network provides leased-line and dial-up service to businesses in 900 cities in 100 countries, and allows individuals to access the Internet from 1,350 locations in 53 countries. Several hundred global companies, tens of thousands of mid-sized businesses and more than a million individual Internet users use the network.

News that IBM would divest itself of its network leaked as early as September, with IBM confirming sell-off plans mid-month. IBM started the network in the early 1980s to share data internally, according to Louis Gerstner, IBM's chairman and CEO. When customers asked for data infrastructure services, IBM extended the network, since telecommunications companies' infrastructure at that time was mostly analog and local, Gerstner said.

Now, with telcos earnestly focused on building up their data infrastructure, "it doesn't make sense for us to make that kind of investment, when the telecommunications companies, whose core competencies are infrastructure, are going to," Gerstner said.

IBM will concentrate on offering network services, such as messaging and e-commerce applications, as part of its services division, but it will no longer offer data-infrastructure services.

"Both companies in turn will be able to focus on the core businesses they have," Armstrong said.

The fact that the deal involves cross-outsourcing agreements is no surprise either. IBM's goal in selling the network was to find a buyer that could also manage the network's operations, including the part of the network IBM will continue to use, Sam Palmisano, general manager of IBM Global Services, told the IDG News Service in September. He added that at the time IBM was particularly looking at large telecom carriers as possible buyers. Japan's Nippon Telegraph & Telephone was thought to be a prime candidate to be the buyer.

AT&T will meld IBM's network into its own networking services unit, AT&T Solutions. Around 5,000 IBM employees will join AT&T as part of the deal, the companies said.

IBM and AT&T expect the deal to be completed, pending shareholder approval and clearance from regulators, by mid-1999.

Analysts uniformly applauded the news. Strategically, the move lets IBM rid itself of the distraction of being a network operator and focus on services and applications, and lets AT&T significantly expand its international presence, analysts said.

"Both of them are doing the right thing-they're concentrating on where their core assets are," said Robert Rosenberg, president of Insight Research in Parsippany, N.J. "IBM really doesn't need to be in the business of managing a network," said Maribel Lopez, an analyst with Forrester Research in Cambridge, Mass.

AT&T's beefed up international presence will be attractive to customers who want global network reach, analysts said.

"A lot of multinationals who may use AT&T for long-distance services or outsourcing have always wanted large volume discounts, and now they're able to go to AT&T for across-the-board" service, said Amy Sachrison, senior analyst at the Aberdeen Group in Boston.

AT&T customers will gain increased network access to more of their remote facilities and partners, Rosenberg said. "It's just going to make the ability of AT&T to hit those second-tier cities...that much stronger," Rosenberg said.

For example, a Thai businessman, whose company is an AT&T customer and who visits the U.S., will now be able to dial a local number to connect back to his company network in Thailand, Aberdeen Group's Sachrison said.

The deal will also beef up customers' choices of services from AT&T, analysts said.

"It probably means that you'll be able to get a better managed data offering from AT&T than you could in the past," Lopez said.

Analysts also said the 5,000 IBM employees who will go to work for AT&T are a major win for AT&T's expansion.

"That expertise is hard to come by, especially overseas," Rosenberg said.

The 5,000 IBM networking-gear experts will let AT&T immediately focus on network integration, Lopez said.

"To have them out of the chute is a big win," she said.

With the addition of IBM's global network, AT&T will be a formidable competitor to Sprint, WorldCom MCI and other telcos with global capabilities, and Sachrison of the Aberdeen Group said it was about time AT&T beefed up its global capabilities.

"It's a catch-up move, but (offering global services is) something that they needed, to be able to compete with global providers," Sachrison said. "It's something you would expect AT&T to be able to do and now with this purchase they can."