IBM Slammed With Federal Suspension

IBM took a big hit from the U.S. government yesterday with the announcement that the vendor is temporarily suspended from participating in new business with federal agencies.

The notice of temporary suspension was issued by the Environmental Protection Agency (EPA), according to a statement released last night by IBM. The EPA is currently investigating possible violations of the Office of Federal Procurement Act regarding a bid submitted by IBM in March 2006.

The U.S. Attorney's Office for the Eastern District of Virginia has already served IBM and some of its employees with grand jury subpoenas and requested testimony and documents regarding their interactions with the EPA.

While IBM's suspension may be good news to rival vendors such as EMC and NetApp, the dispute could limit the storage options for many users in the federal sector, which relies heavily on IBM gear.

In its statement, IBM confirmed that it is cooperating with both the EPA and the U.S. Attorney's investigation, although the vendor is also planning to defend its corner."IBM intends to take all appropriate actions to challenge the suspension and limit its scope," IBM's statement said. According to federal procurement procedures, the company has 30 days to contest the temporary suspension.

The vendor's existing contracts are unaffected by the suspension, which applies to all IBM business units, including storage.

The EPA's move, which includes all federal agencies, nonetheless comes at a bad time for IBM, given the current economic climate. Only last year, for example, the vendor was looking to its government business to make up for a spending shortfall in markets such as financial services.

IBM does not break out specific government sales figures, although analyst firm Goldman Sachs estimates that the vendor's federal business accounts for about 1 percent of total revenues, or $1 billion.

"The potential loss of any business is troubling, particularly in the current spending environment," wrote Goldman Sachs analyst David Bailey in a note released this morning. But he added that the suspension is not as negative as it may first appear."Even in a downside case, where IBM is suspended for an entire quarter, and loses 25 percent of the segment's full-year revenue, we estimate the impact to the bottom-line would be around 2 cents, which we believe IBM could make up from other areas," he stated.

The EPA's suspension is not the first time that IBM has found itself embroiled in a dispute with a public sector organization, as evidenced by the high-profile clash with the state of North Carolina.

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