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AT&T buys IBM unit
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December 8, 1998: 7:03 p.m. ET
$5B purchase of global network jumpstarts telecom company's plans
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NEW YORK (CNNfn) - AT&T Corp.'s desire to jumpstart its global networking plans, and IBM Corp.'s wish to focus more on e-business applications, combined to create Tuesday's series of transactions that include the $5 billion sale of IBM's global network to AT&T, the companies said.
As part of the multifaceted deal, AT&T (T) will provide a "significant portion" of the global networking services for IBM at a cost of $5 billion over 5 years. And IBM (IBM) will provide data-processing services -- including billing for AT&T customers -- at a cost to the telecommunications company of $4 billion over 10 years.
"This deal will match each company's strength with the other company's business needs," said C. Michael Armstrong, AT&T's chairman and chief executive officer, at a New York news conference announcing the transaction. "With the prospect of building on these agreements, AT&T and IBM can build greater value" for themselves and for each other.
"We don't want to compete with our customers, that doesn't make sense," said IBM Chairman and CEO Louis V. Gerstner Jr. in explaining why the computing giant sold the global network operations.
He said telecommunications companies are clamoring to build networks similar to the one IBM created out of necessity in the early 1980s, and that it was better for the company to get out of the way and concentrate on its e-business applications and solicitations.
Network serves 59 countries
The IBM operations serve 45,000 customers, according to Gerstner. These include hundreds of large companies, thousands of mid-sized companies and Internet service providers that reach more than 1 million people in 59 countries. The network has 1,300 dial-up points in more than 850 cities.
Gerstner said his company has been shopping the global network for some time, and that other companies he would not disclose had made offers.
"The reasons we chose AT&T are very complex," he said. "What AT&T put on the table was a significant relationship" that went beyond the network sale and included the outsourcing agreements.
Gerstner stressed that the deal with AT&T is not exclusive. "We have very, very important and constructive relationships with other telecommunications companies," he said. "We will continue to work with other telecom companies around the world."
Armstrong, who worked for IBM for 31 years before joining AT&T, said his knowledge of the company made him aware of the value of the global network. But "the opportunity to gain an immediate presence in this industry was a driving force" in the transactions, he said.
Armstrong also told the Moneyline News Hour with Lou Dobbs that the deal is essential to AT&T's presence as a global communications company.
"Borders all over the world are coming down, and as they come down opportunities spring up," Armstrong said. "Companies reach further to compete with their products and services, and when they want to open shop, wherever they want to open shop, they want those communications services to support their people and their products, and we've got to be there."
Employees to be swapped
Under terms of the deal, 5,000 IBM employees in its global network unit will come to work for AT&T, while 2,000 members of AT&T management involved in data processing will go to work for IBM. Armstrong stressed that no jobs would be lost as a result of the transaction, and officials of both companies said they expect the swapped workers to be able to remain in the communities where they currently live.
Armstrong said the global network acquisition would have a cost benefit to the proposed 100-city, Internet-protocol network that AT&T plans to establish with British Telecom (BTY) in a deal announced in July. But he couldn't immediately say how much of that network's $5 billion cost would be defrayed by the transaction.
But the chairman also said he believed the deal would have little impact on whether the European Union will approve the British Telecom venture. "The amount of this network that will affect the joint venture, I do not consider material," Armstrong said. "I think the regulators, when they look at it, will agree with me."
"What it (the deal) does is take AT&T from being way back in the pack and (making it) able to serve other companies," he added.
Network growth is AT&T focus
AT&T would now focus on increasing the size of the network in order to compete "with very strong rivals," Armstrong said. "This doesn't give us the presence everywhere we want." He also said the company would also be focusing on growing its local and long-distance phone services and on becoming one of the leading providers of Internet access to individual customers.
And Armstrong said he'd like to see the transactions serve as a catalyst to expanding both companies' reach to small and mid-sized businesses that need to become global market participants.
Gerstner said IBM has no definitive plans for how it will spend the $5 billion from the global networks sale - which he doesn't expect to receive until the second quarter of 1999, once the deal gets the required regulatory approval in the U.S. and in other countries. He said the funds are likely to be used in the same way as other company income, with priority toward research and development and selective acquisitions.
AT&T said the transaction is expected to minimally dilute earnings in the first full year of operating the network, and then be accretive of earnings thereafter.
AT&T (T) closed 2-1/4 higher at 67. IBM (IBM) stock closed at 168-3/16, up 1. 
-- by staff writer Mark Meinero
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