Editor's Note: Herb Greenberg's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published Jun 28 on RealMoney.
With its stock getting clobbered,
Friday is touting the signing of $445 million in new technology-outsourcing contracts. The new deals, the company said, include a new contract with the state of Arkansas, a contract extension with Bell South Technology Group and a three-year renewal with Main Street Direct.
It reminds me of a deal EDS announced on April 1, in which it would get $300 million from
. That sure looked good at the time. But unless you were paying extra close attention, here's something you might have missed: In what appears to be the ultimate "you scratch my back, I'll scratch yours" arrangement, EDS and StorageTek struck deals to outsource business to each other.
EDS's side of the deal, which calls for EDS to handle a portion of StorageTek's IT infrastructure, was actually an expansion of an existing contract between the companies. To do that work, EDS will hire 300 StorageTek employees.
What wasn't immediately announced was that three days earlier, on Friday March 29 -- the last business day of the quarter -- StorageTek agreed to manage EDS's secondary data storage operations for 10 years. As part of that deal, StorageTek also bought $52 million of storage equipment from EDS. Much of it, it turns out, is equipment that EDS originally bought from StorageTek. Nifty, huh?
The first skimpy hint of this deal was included in StorageTek's earnings release April 23. Additional details came out on May 13 when StorageTek filed its 10-Q. Noticeably absent from any of StorageTek's disclosures was the full value of
deal with EDS.
Why wasn't it disclosed? "We're still trying to figure out how much of it is replacement business, and how much will be incremental new business," a spokeswoman said. (Isn't there usually an estimate of that before a deal is signed?)
It makes you wonder whether the deal was hastily put together, and whether one deal hinged on the other. The spokeswoman says the deals were independent of each other.
Maybe, but this much is clear: Even if it's not intentional, and even if the timing of the deals was coincidental, both companies, which have long-standing business relationships, are clearly helping one another. EDS, which is in dire need to show growth in backlog, gets just that from an existing customer, which also happens to be a longtime supplier. EDS, whose cash flow is under a microscope these days, also receives $52 million in cash, mostly for selling equipment back to StorageTek.
Meanwhile, StorageTek, whose revenue has been sliding, gets 300 employees off its books. (Good for earnings!) Based on an average salary (I'm just guessing here) of $50,000, that's $15 million per year. Not only do its expenses go down, but in return, by repurchasing the equipment it had sold EDS, StorageTek gets more assets that can be depreciated as a long-term capital expense, rather than booked as an immediate expense, as was the case with the salaries of the 300 employees.
Quite the deal!
Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to
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Brian Harris assisted with the reporting of this column.