US Airways, Delta Merger Could Cost IBM Millions In Lost Outsourcing Revenue 2

The proposed merger between US Airways and Delta Air Lines could result in the termination of a major information technology outsourcing deal that Delta recently signed with IBM, according to a document obtained by InformationWeek.

In a letter to Delta CEO Gerald Grinstein, dated Sept. 29, US Airways CEO Douglas Parker says that Delta's IT outsourcing contracts "are appropriate for a standalone plan, but that would be different were Delta to be merging." In August, IBM announced that it had secured a seven-year IT infrastructure outsourcing deal from Delta.

The value of the deal wasn't disclosed, but it's likely to be worth at least tens of millions of dollars to IBM given the price tag on similarly sized contracts.

US Airways' Parker tells Grinstein that if Delta proceeds with IT outsourcing deals and other contracts, any potential merger with US Airways could be significantly devalued. "If we defer a joint investigation of a potential merger, only to find many of the synergies are no longer achievable because of actions taken in support of a standalone plan, your stakeholders could lose significant potential value," says Parker, whose letter was released to Delta shareholders.

A spokesman for US Airways says Delta's IT outsourcing deals will be "on a short list" of discussion subjects when US Airways officials next meet with Delta's creditors to push for the merger. IBM officials were not immediately available for comment.

US Airways is attempting an $8 billion hostile takeover of its bankrupt rival and says such a deal would result in annual operational savings of $1.65 billion. US Airways says $710 million of that would be realized through expense reductions achieved in part through the consolidation of IT systems.

IBM previously has seen significant outsourcing deals scotched by mergers involving corporate customers. Former Bank One CIO Austin Adams terminated a $5 billion outsourcing deal between J.P. Morgan Chase and IBM after Bank One and Chase merged in 2004 and Adams became CIO of the combined companies.

In 2003, Sprint tapped IBM Global Services to handle a number of key software development and IT management tasks under a five-year, $400 million deal. However, Sprint has sought to undo much of that deal since its merger last year with Nextel. Sprint also is accusing IBM in court of failing to achieve promised productivity improvements.

In August, Delta received bankruptcy court permission to outsource a range of IT services to IBM, including mainframe computer and midrange server management. About 200 Delta technology workers are scheduled to join IBM to help fulfill the deal. If it's not canceled, that is.