EDS to Buy MCI WorldCom's Systemhouse for $1.65 Bln (Update2)
Bloomberg News
February 11, 1999, 8:14 a.m. ET
EDS to Buy MCI WorldCom's Systemhouse for $1.65 Bln (Update2)
(Adds investor comment in fourth paragraph.)
Plano, Texas, Feb. 11 (Bloomberg) -- Electronic Data Systems
Corp., the No. 2 U.S. computer-services company, agreed to buy
MCI WorldCom Inc.'s Systemhouse computer-management division for
$1.65 billion to expand its client base.
Under a 10-year agreement, EDS will offer computer-
management and other services to MCI WorldCom, the No. 2 U.S.
long-distance phone company, worth $5 billion to $7 billion in
revenue -- the largest such contract in the industry. MCI
WorldCom will provide phone and data services to EDS and its
customers, worth an estimated $6 billion to $8.5 billion.
Acquiring Systemhouse will reduce EDS's reliance on orders
from former parent General Motors Corp. that accounted for about
a quarter of 1998 revenue. MCI WorldCom is shedding the unit to
focus on its phone business. Together, they will develop products
to capitalize on surging demand for voice, data and electronic
business services.
''There'll be more alliances between telephone and computer-
service companies as the line between the industries gets
hazier,'' said Benoit Flamant, who helps manage $70 million
including MCI shares at IT Asset Management in Paris.
Systemhouse, which had revenue of $1.7 billion in 1998,
competes with EDS, International Business Machines Corp.,
Computer Sciences Corp. and others. Analysts estimate it had an
annual profit of about $162 million and profit margins of about 8
percent to 10 percent.
Workforce Exchange
As part of the Systemhouse agreement, more than 12,000 MCI
WorldCom and Systemhouse employees, mainly in the U.S. and
Canada, will be transferred to EDS. MCI WorldCom will take on
about 1,000 EDS network employees from around the world.
EDS expects to generate ''substantial synergies'' by
integrating Systemhouse into its businesses.
''Aligning MCI WorldCom and its global telecommunications
capabilities will enhance EDS's ability to serve our customers as
they move into the digital world of electronic business,'' said
Dick Brown, EDS chairman and chief executive officer.
Brown, who took over as EDS's third chief executive last
month, wants to boost sales and earnings after EDS's fourth-
quarter profit fell 14 percent, while revenue rose 4.3 percent to
$4.4 billion. Sales from General Motors were little changed.
The executive, who turned Cable & Wireless Plc into the
U.K.'s second-biggest telecommunications provider, is expected to
aggressively pursue more profitable contracts from consulting.
Last week, he said he expects EDS to reclaim earnings growth of
10 percent or more because of strong demand for computer
services.
MCI WorldCom had held discussions in the past two months
with several suitors for Systemhouse, people familiar with the
discussions said.
Ebbers' Pledge
WorldCom completed its $47 billion purchase of MCI
Communications Corp. in September, and Chief Executive Bernard
Ebbers said he wouldn't tolerate declining sales as he seeks to
deliver on promises for revenue and profit growth.
Sales at Systemhouse, which MCI purchased for $1 billion in
1995, fell 25 percent in the third quarter after it eliminated
some businesses.
Ebbers has told investors to expect annual sales growth at
the combined MCI WorldCom of about 20 percent. He's also said the
company will boost profit by cutting $2.5 billion in costs in
1999.
MCI bought Ottawa-based SHL Systemhouse in 1995 to break
into the computer-consulting business to help it compete with
archrival AT&T, as well as a joint venture between EDS and No. 3
long-distance company Sprint Corp.
Systemhouse had $1.2 billion in sales at the time. The
company, a pioneer in linking a variety of small and large
computers over high-speed communications lines, was considered a
perfect fit for MCI.
For Ebbers, the communications business is all about growth,
and MCI WorldCom is outpacing sales gains at AT&T and Sprint
because of early investments in fast-growing Internet,
international and local phone markets.
When Ebbers, who led WorldCom in more than 50 acquisitions
in the past 10 years, talks about building the company of the
future, those are the investments he mentions. He doesn't talk
about computer consulting.
''EDS offers MCI WorldCom proven information technology and
integration expertise, which will be key to our ability to
maintain our technology leadership position as we continue to
aggressively deploy facilities and expand globally,'' said John
Sidgmore, MCI WorldCom vice chairman in a statement.
--Andrew Brooks in New Orleans with Melissa Pozsgay in the Paris |
