London: Canada’s CGI Group Inc. agreed to buy Anglo-Dutch IT services firm Logica for $2.64 billion on Thursday, giving it the scale and geographical presence to meet multinational companies’ demands for global IT contracts.
CGI chief executive Michael Roach said that despite Europe’s economic problems, he believed there was still business to be done in the continent.
“We have to be here because our clients are here,” he told reporters on a call. “Our clients are globalizing; they have a footprint in North America and they have a footprint here.
Big bet: CGI chief executive Michael Roach says despite Europe’s economic problems, there is still business to be done in the continent. Photo by Aniruddha Chowdhury/Mint
“We have been able to serve them in North America but we haven’t been able to follow them to Europe, therefore, we run the risk of losing them.”
The deal will more than double CGI’s annual revenue and number of employees, taking sales to about $10.4 billion and staff numbers to 72,000 in 43 countries, CGI said.
It will be better placed to compete with companies such as International Business Machines Corp., Accenture Plc. and Cap Gemini SA.
Logica, which provides IT services to companies and governments, has been hit hard by its clients shelving technology upgrades. It issued a profit warning at the end of last year and said it would slash 1,300 jobs in a restructuring.
Its outsourcing business, which serves companies from operations in Europe and from cheaper off-shore locations, has given some respite, but analysts have said it has been too slow to adapt to the changing market.
Logica chief executive Andy Green said the company needed to become larger to compete for more multinational contracts, and its position had been weakened by uncertainty in Europe.
“We are in a competitively intense industry and it’s a globalizing one where scale has become an ever more important factor in both cost competitiveness and in the service,” he said. “In Europe there continues to be considerable economic uncertainty that affected confidence in demand from both public and private sector clients.”
Logica’s investors will get 105 pence in cash for each share, a 60% premium to Wednesday’s closing share price, under the terms of the deal, which is backed by Logica’s board and the holders of 18.2% of the stock.
Analyst Roger Phillips at Merchant Securities said the timing of the deal looked somewhat opportunistic, although he also noted that the offer represented 6.5 times enterprise value over core earnings, higher than the 4.4 times average for the European IT services sector average.
“We think this is a good deal for Logica shareholders given the long-term structural challenges the group faces with high European public sector exposure, particularly in the UK,” he said. “Also we feel the CEO’s strategic plan has failed to work and so the business is in a state of strategic drift.”
Logica’s shares, which were valued at 139 pence a year ago, were up 65% at 108 pence at 1102 GMT, above the offer price on hopes of a rival bid emerging, for example from an Indian company like Infosys.
Investec analyst Julian Yates said a rival bid could not be ruled out.
“Indian players may be seen as counter bidders but this would represent a material strategic risk considering the cultural and business focus differences,” he said. “Private equity, we suspect, would also look at the business but the cash costs needed for restructuring and already levered balance sheet may put off this camp of investors.”
Green defended the price agreed, saying it was good deal for shareholders, clients and staff. He also said there would be some job cuts at head office and in other administrative functions, but the losses would be limited because there was little geographical overlap between the companies’ businesses.