IBM Lands Lucrative Outsourcing Deal

Big Blue inks $324 million contract with Bristol-Myers Squibb for systems integration work.
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SAN FRANCISCO -- IBM (IBM) - Get Report landed a large outsourcing contract that bolsters IBM's lead as a high-end systems integrator.

Big Blue's Global Services unit won a 10-year contract with

Bristol-Myers Squibb

(BMY) - Get Report

Thursday valued at $324 million.

Shares of IBM were up $1.41, or 1.1%, to $128.96 on the news, as it neared its 52-week high of $129.99 set just a week ago. The stock has appreciated 32% since early January, when macroeconomic fears pushed it down to $97.59. It now trades at 15 times 2008 earnings and 13.5 times 2009 earnings.

"This is a good win for IBM and a great extension of the relationship with BMY," Technology Business Research analyst Eugene Zakharov said in an email response to questions Thursday.

Given market trends and the value of the contract, "this deal with BMY is very important for IBM" as 10-year deals have become rare, Zakharov stated. Just over 50 IBM clients have signed 10-year contracts in the past four years, with an average value of $110 million.

"Human-resources outsourcing deals of this type that include consulting, systems integration and outsourcing can be very profitable," Zakharov stated. IBM will build a human resources system that then provides a recurring revenue stream for maintenance.

The deal includes integration of application software from developer


(SAP) - Get Report


IBM competes primarily against


(ACN) - Get Report

for the type of services covered by this deal to automate and re-engineer a system.


(HPQ) - Get Report

also is serving notice that it wants to compete in that space with its recently announced buyout of

Electronic Data Systems



That deal may indicate that the hardware company has aspirations to become a full-service consulting and integration firm on IBM's model. EDS is primarily known for providing basic outsourcing, but will bolster H-P's place in the services business.

Although the deal is sizeable, averaged over the life of the contract, it represents just $8.1 million a quarter, or 0.08% of IBM's services revenue for the most recent quarter. The unit's services business took in $9.7 billion, up 17% year over year.

"The quarterly impact ... will not be major," Zakharov said. However, IBM will be able to bill up front for consulting and systems integration. "The deal is likely to bring more revenue initially," while the labor outsourcing service tends to generate most of its profit at the end of the contract, he wrote.

Despite its high-dollar value, the Bristol-Myers deal is not IBM's largest. In 2003, Big Blue signed one of the first big labor outsourcing deals, valued at $400 million over 10 years, with

Procter & Gamble

(PG) - Get Report

, according to Zakharov.

The BMY deal "shows that IBM is well entrenched to help

the largest conglomerates" with labor and outsourcing, Zakharov said.