The telecoms giant revealed that in a short statement that it agreed a deal where it will provide network services to IBM and its clients, in a move that will bring in $1bn in additional annual revenue over the next five years.

As part of the deal, AT&T will also take on an unspecified number of IBM employees across more than 30 countries. It also said that it would incur charges of $80m over the next 12 months relating to the arrangement.

The pact between the two companies originates from IBM’s sale of its corporate networking business to AT&T for $5bn back in 1998. AT&T also got a $5bn deal to handle IBM’s networking needs while IBM received a 10-year, $4bn contract to support AT&T’s billing and installation for its long-distance company. Some 5,000 IBM employees and 2,000 AT&T staff switched sides as part of the deals.

This contract extension comes at an interesting time for the industry where the line between IT and communications is being increasingly blurred by convergence.

Like all major telecoms operators, AT&T is aiming to expand its own services business, announcing earlier this year that it was pumping some $750m into areas such as data center expansion, VPN management, remote monitoring, and managed security services. The company told Global Computing Services in March that while its main competition at the WAN level comes from Verizon, BT and Orange Business Services, it does sometimes come up against IBM in areas such as hosting.

The recent M&A activity of the two companies also suggests that they are likely to cross swords more often in the future. IBM beefed up its capabilities in network security with the $1.3bn takeover of managed security services specialist ISS in August 2006, while AT&T paid $300m for applications hosting company USinternetworking in September 2006.

The IBM/AT&T relationship mirrors that between Hewlett-Packard and BT. The two companies originally teamed up in 2004 with a two-way $1.5bn managed services deal and an alliance that has seen them win joint deals with clients including Anglo American, PepsiCo, and Hertz Europe. EDS used to have a close relationship with MCI, but following its purchase by Verizon, it was scaled down last year.