CGI Group Inc. suddenly has a huge global footprint, vaulting it closer to the top tier of IT services groups with a $2.8-billion deal for Logica PLC.
Until now, CGI’s customers have been concentrated in Canada and the United States. But with the proposed acquisition of Logica, it will pick up access to companies in France, Britain, Sweden, the Benelux countries, parts of Central Europe and, to a lesser extent, Australia, India, North Africa and East Asia.
It’s the biggest deal in the history of the Montreal-based company and will, according to chief executive officer Michael Roach, create the sixth-largest information technology service provider in the world, with a diverse offering and strength in North America and Europe. Its challenge will be to use its new-found heft and geographic reach to consolidate its position as a global player, closer to the likes of the giants in the industry such as Accenture PLC and IBM Corp.
“This isn’t the summit,” founder and executive chairman Serge Godin said Thursday as he unveiled the friendly offer for the Anglo-Dutch IT group. “This is a work in progress.”
CGI must follow its customers as they expand internationally or risk losing them, Mr. Roach told analysts on a conference call from London.
While Logica has been caught up in Europe’s troubles, Mr. Godin does not see the deal as a risky bet, saying the public and private sectors will continue to invest in IT, good times or bad.
“IT is part of the solution, even for governments that are cutting back,” he said. “It’s become essential.”
The public sector, for example, sees IT solutions as a way to boost efficiency and cut costs, he said.
Logica offers business consulting, systems integration and IT outsourcing to governments and companies. CGI provides everything from IT outsourcing – for example, handling a company’s payroll system – to cloud computing. A big chunk of its revenues come from government contracts as well as business from the health care sector and financial services companies.
Logica in particular has struggled amid the turmoil of Europe. It has issued two profit warnings after announcing plans in December to slash 1,300 positions and implement a major restructuring.
Logica’s margins are lower than CGI’s, 4Front Capital Partners Inc. analyst Dushan Batrovic said in a research note Thursday.
What’s more, its “European exposure raises some caution flags given the macroeconomic situation on the continent,” he said.
Logica shares lost half their value over the past year. CGI’s offer is at a 60-per-cent premium to its share price of 65.70 pence as of Wednesday.
There’s also the possibility of a counterbid from Accenture, IBM or another suitor.
The Logica acquisition could end up being a distraction from CGI’s U.S. growth strategy as well as from its plan to bolster its high-margin intellectual property business, said Mark Schrutt, director of IT services at IDC Canada.
Still, he added, “Logica fills a huge gap with regards to Europe.”
There are always new challenges that create opportunities, Mr. Godin said, noting that major financial institutions have been clamouring for IT systems to ensure full compliance with tightened regulations covering derivatives.
CGI, which has done more than 70 acquisitions since it opened for business in 1976 operating out of Mr. Godin’s basement in Quebec City, is comfortable with the size of the Logica deal, which will more than double annual revenue to the $10-billion range, while also doubling its work force to 72,000 people in 43 countries, he said.
Helping finance the transaction is the pension fund giant Caisse de dépôt et placement du Québec. It said in a separate announcement that it’s investing $1-billion in CGI, money that will help finance the deal.