InformationWeek

Perot, Swiss Bank Cash In

Both sides get a piece of the other in a unique partnership that goes beyond outsourcing

By Bruce Caldwell
Issue date: Sept. 25, 1995

The radical approach adopted by Perot Systems and Swiss Bank Corp. on their recent strategic alliance is helping to turn information technology services into more than just outsourcing.

Under the deal announced on Sept. 6, the bank in Basel, Switzerland, will take a 24.9% equity position in privately held Perot Systems. In turn, the Dallas IT services firm will take a 40% stake in Systor AG, a Swiss Bank unit that develops and sells software and client-server systems for the banking industry in Switzerland.

Systor has about $100 million in annual revenue, estimates Stephen McClellan, an analyst with Merrill Lynch., and an adviser to both parties.

"This is not an outsourcing contract," says Morton Meyerson, chairman of Perot Systems. "Normally, companies can't manage IT and want to get rid of it, or want to cut costs. This is neither. We're starting a business."

Under the old outsourcing model, the services customer sought to cut its information systems budget by contracting the work out. The Perot-Swiss Bank deal turns that relationship on its head. Here, the outsourcer, long rumored as a takeover candidate, is the one getting the much-needed cash. The customer, meanwhile, gets a stake in the outsourcer. In a further twist, the two companies become joint venture partners.

The result, predicts Marc Sternfeld, head of consulting firm Trans-Form Inc. in New York and a former chief information officer at brokerage Salomon Bros., will be a spark that ignite other deals like this one, because Swiss Bank officials have "taken their technology budget and put it into an investment they can control."

Others to go beyond the old outsourcing model include Eastman Kodak Co. and IBM, which in 1993 formed Technology Service Solutions to provide PC services for Kodak and other companies. Technology Service Solutions now brings in more than $700 million annually.

Under their agreement, Perot Systems will manage all computer operations for SBC Warburg, Swiss Bank's international investment banking division--for about $250 million a year, roughly a quarter of the bank's total IT budget. That contract, which runs for 25 years, will nearly double Perot Systems' annual revenue to $600 million.

In the next 18 months, when Perot Systems plans to take its stock public, the firm's market value should be about $1 billion, predicts Peter Wuffli, Swiss Bank's chief financial officer. That would mak e the bank's stake worth about $250 million. In addition, Wuffli says, "we could double that value in five years" by contributing 700 Swiss Bank client-server experts to a new global financial-services division set up by Perot Systems.

'Good Deal'
"It's a good deal for Swiss Bank," says McClellan, "and it does miraculous things for Perot Systems." The bank, he says, "is getting a nice chunk of equity in a company that will do very well with its initial public offering."

For Perot Systems, he says, the deal "leapfrogs them into the mainstream of systems integration and outsourcing, and gives them a major European focus and presence to go after financial transaction services."

The deal with Perot Systems is an improvement over an earlier Swiss Bank plan to spin off its IT operations into separate businesses, says James Burns, chief operating officer for Swiss Bank in North America. Perot can market its back-office skills and resources along with Swiss Bank's proprietary middleware and network-management tools, he explains, turning a cost center into a profit center.

But first, Meyerson says, "we'll be focused on getting Swiss Bank's unit costs down" through consolidation and standardization. Those tasks are critical for Swiss Bank's investment banking division because of acquisitions that have doubled the investment bank to 10,000 employees, supported by three data centers and distributed computing networks running DOS and Unix systems.

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