CGI CEO Michael Roach.
Information technology powerhouse CGI Group Inc. is expanding its U.S. presence with a $900-million acquisition that gives the Montreal-based firm an entry into the lucrative world of government services - especially defence and intelligence IT spending.
CGI said Friday it will purchase Virginia-based Stanley Inc. for $903-million (U.S.), or about $37.50 a share. The price tag represents a 29-per-cent premium to Stanley's stock price at the end of the trading day on Thursday.
For CGI, the deal - which has yet to close, but appears to have the support of Stanley's board - represents an all-out thrust into the U.S. market, where the company already does about a third of its business. With the Stanley acquisition, that number jumps to 50 per cent, and further boosts CGI's reputation as a global powerhouse.
Stanley makes all of its money selling IT services to the U.S. government. The bulk of its revenue comes from areas such as intelligence and cyber-security. Those areas have experienced a resurgence in recent years, especially as Washington focuses on the threat of cyber-spying and information warfare. Recent instances of alleged Chinese hacking and identity theft rings run by organized criminal groups in Europe and Russia have only heightened such fears, creating opportunity for firms specializing in keeping critical networks safe.
"The acquisition of Stanley is in line with our Build and Buy profitable growth strategy, and is consistent with our commitment to continue expanding our footprint in the strategic U.S. market and specifically in the U.S. federal market," CGI CEO Michael Roach said in a statement.
"From an investor perspective, this transaction will be accretive to GAAP [generally accepted accounting principles]earnings per share within the first 12 months."
Based on 2009 numbers, the combined companies would have total revenues of approximately $4.5-billion and 31,000 employees.
CGI will incorporate its new purchase into CGI Federal, a subsidiary that deals with U.S. government contracts and will now become one of the biggest players in the government IT services field, with total annual revenue of more than $1-billion.
"The consolidated company will continue serving all three branches of government, 12 Cabinet-level agencies, the four military services, and a broad range of intelligence and national security agencies," CGI said.
Many analysts had been expecting such a deal from CGI for some time. UBS Investment Research analyst Jason Kupferberg said the government IT sector is ripe for further consolidation, with several firms - including ICF International, SRA International, Inc. and NCI Inc. - making for attractive acquisition candidates.
CGI investors did not seem overly excited by the acquisition: CGI shares dropped 1.9 per cent to close at $14.90 Friday. Stanley shares, however, soared 27 per cent on the news, closing at $36.79 (U.S.).
CGI has expanded aggressively into the government market. Late last year, its U.S. subsidiary was one of seven firms selected by the U.S. Environmental Protection Agency for a $955-million, seven-year IT contract.
But with its increasing emphasis on U.S. business, some analysts believe the Montreal firm will have to expand just as aggressively outside the government sector. Indeed, Mr. Kupferberg said in a note to clients, CGI's "bigger challenge in increasing brand awareness and competitive traction is on the commercial side of the U.S. market."