Some Good News for Siemens

The German military selects Siemens and IBM to service a 10-year, $9.6 billion IT contract

For a change, some good news out of Siemens. The German engineering and electronics giant, embroiled in an escalating bribery scandal, said on Dec. 28 it won a 10-year, €7.1 billion ($9.6 billion) contract with International Business Machines to modernize the telecoms and computer systems of the German armed forces.

Siemens' business services arm and Armonk, N.Y.-based IBM (IBM) will set up a new company with the German government for the so-called Herkules project, the largest public-private partnership in Europe.

Siemens (SI) will be responsible for operating and modernizing some 140,000 personal computers, 7,000 servers, 300,000 fixed-line phone and 15,000 mobile phones. IBM will oversee the operation of the data centers, including Web-based applications, SAP software, and Lotus Notes.

"We are not only bringing comprehensive expertise in IT and processes, we are also contributing the experience we have gained in many successful partnerships between state and business," the Munich-based company said in a statement. Siemens has worked previously with Germany's armed forces on a number of other projects.

Other projects under way for Siemens Business Services include a 10-year contract with Britain's passport service to automate processing. The unit is counting on large government projects to become profitable: it posted a loss of €549 million ($721 million) in 2006, on sales of €5 billion ($6.57 billion).

IBM has been an information technology partner of the Bundeswehr for nearly 50 years. "Herkules will bring innovation and transformation to the Bundeswehr," said Rudolf Bauer of IBM Deutschland in a Dec. 28 statement.

The announcement comes as Siemens faces allegations that company money was transferred to foreign bank accounts to make slush fund payments. At least six former employees are being detained over the allegations. Concern about the extent of the corruption prompted Nokia (NOK) to postpone its fixed-networks joint venture with Siemens until the Munich company completes its own investigation (see, 12/15/06, "Siemens Weathers the Storm").

That has led some private investor groups to call for the resignation of Chairman Heinrich von Pierer. Both von Pierer and Chief Executive Klaus Kleinfeld have denied knowledge of alleged secret accounts.

Siemens shares rose €0.78 to €74.90 ($98.37) in Frankfurt trading. They are up 5.4% for the year so far. The company's American Depositary Receipts rose 1.2% to $98.78 in afternoon trading on the New York Stock Exchange. IBM shares fell 0.2% to $97.03.

The country's parliament gave the green light to the contract in mid-December, selecting Siemens and IBM over rival bidders such as European Aeronautic Defence and Space (EADS).