Loral Corp. Acquires IBM's Federal Systems Co. Division for $1.575 Billion

Strategic Insights -

In a competitive bidding process, Loral Corp. has secured the acquisition of IBM's Federal Systems Co. division for a staggering $1.575 billion in cash. Effective January 1, 1994, the sale is expected to close later this month, making it IBM's largest move yet to streamline operations. The acquisition brings Loral an annual revenue of $6 billion, a backlog of $5.7 billion, and over 35,000 employees, including most of IBM Federal's 11,400 workers.

Key Takeaways:

  • Loral Corp. has acquired IBM's Federal Systems Co. division for $1.575 billion in cash, outbidding several major contenders including AT&T, Martin Marietta, Lockheed, Grumman, Hughes, and Northrop.
  • The acquisition is expected to give Loral an annual revenue of $6 billion, a backlog of $5.7 billion, and over 35,000 employees, including most of IBM Federal's 11,400 workers.
  • IBM's sale of the division is its largest move to streamline operations, with IBM Chairman Louis Gerstner stating that the "highly specialized" $25 billion a year federal ADP market is "changing rapidly" and the sale is in IBM's best long-term interest.
  • Loral's CEO, Bernard Schwartz, says that IBM Federal operations and technologies "fit extremely well with Loral's" and will provide a major hardware/software systems integrator with 60% of its business tied to the Pentagon and 40% to civilian agencies.
  • The acquisition also brings significant challenges, including a major software snarl in the FAA's modernization program, which has racked up $1.2 billion in new cost overruns and is facing a top-to-bottom review.
  • Loral has announced that it expects IBM Federal's top management team to transfer to Loral, and that Loral will likely try to complete the FAA contract successfully.
  • David Hinson, the new FAA chief, has stated that IBM's attempts to "cure" software problems have already cost the extra $1.2 billion, and that he plans to hire an outside organization to recommend new "realistic" solutions.

Statistics:

  • $1.575 billion: The cash price paid by Loral Corp. for IBM's Federal Systems Co. division.
  • $6 billion: Annual revenue expected from the acquisition.
  • $5.7 billion: Backlog of business acquired through the deal.
  • 35,000: Number of employees, including most of IBM Federal's 11,400 workers.
  • $25 billion: Annual revenue from the federal ADP market.
  • 60%: Percentage of Loral's business tied to the Pentagon.
  • 40%: Percentage of Loral's business tied to civilian agencies.
  • $1.2 billion: New cost overruns in the FAA's modernization program.
  • 1988: Year in which the FAA contract was awarded to IBM.

Sources:

  • Loral Corp.
  • IBM
  • FAA (Federal Aviation Administration)
  • Department of Transportation
  • AT&T
  • Martin Marietta
  • Lockheed
  • Grumman
  • Hughes
  • Northrop