December 4, 1998 2:15 PM PST

Lockheed, CSC vie for IRS contract

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Never have so many waited for the IRS to call.

Computer Science Corporation and Lockheed Martin will know Thursday who has won a 15-year contract to revamp the Internal Revenue Service's beleaguered internal data processing systems.

"It's going to be the biggest outsourcing contract in the history of the industry," said Merrill Lynch analyst Steve McClellan.

Though the contract is expected to be announced at $3 billion, its estimated worth will reach $5 billion to $10 billion, according to analysts.

A CSC spokesman declined comment on the outcome of the contract bidding. The project is intended to bring the IRS tax system into the 21st century, he said.

Both teams in the running have an equal shot at the lucrative contract, said McClellan, who today raised his rating for CSC, the third-largest U.S. provider of computer consulting and maintenance services, to "long-term buy" from "near-term buy."

"It's a 50-50, coin-toss jump ball," he said of the IRS contract. "I don't think anyone, including the vendors, has any idea [who will win]. The teams are equal in their quality."

In September, the IRS was named among 24 agencies with network security risks that put critical government operations and data at "great risk of fraud, misuse, and disruption," according to the investigative arm of Congress.

The IRS project, dubbed PRIME (prime systems integration contract), will overlap with some of the agency's Year 2000 efforts. PRIME will revamp antiquated computer systems at the agency. Work on the project is expected to start as soon as the contract is signed.

The winner of the outsourcing contract will serve as prime contractor, overseeing various subcontractors.

To date, the two largest outsourcing contacts have been IBM Global Services' $3 billion deal with Lucent and Dupont's $4 billion contract with Andersen Consulting.

Besides the IRS contract, CSC is also competing with IBM Global Networks and Electronic Data Systems for a $1.5 billion deal with the state of Connecticut. In addition, Alcatel, the French telecommunications equipment maker, plans to hire CSC to run its computer systems, an estimated $500 million deal, McClellan said.

If CSC loses the government contracts, the company is still expected to land several huge deals worth more than $500 million, sparking annual growth of 20 to 22 percent for its fiscal year beginning in April. A CSC spokesman said the company expects to ink a $1 billion contract with a chemical company next week. In January, the company is also expected to announce the outcome of negotiations for a multiyear outsourcing contract with AT&T.

Shares of El Segundo, California-based CSC closed at 60 per share, up 3 for the day. The shares have fallen from a 52-week high of 74.8750 on September 22. Lockheed rose 4.5625 to 105.6875.


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