CGI acquires UK software services company

One of the UK’s last remaining software and information technology services companies, Logica, has been acquired by a smaller Canadian based firm, CGI, in a deal worth £1.7 billion or $2.705 billion in Canadian dollars.

The acquisition price has been set at between $2.6 billion to $3.1 billion. Logica has report it at $1.7 billion in British Pounds. When converted its $2.705 billion Canadian dollars.

The transaction represents a 59.8 per cent premium on Logica’s closing price yesterday, which will no doubt please investors, while CGI has said that expects to receive annual benefits of £125 million by the end of the third financial year following completion of the sale.

Logica’s board of directors unanimously agreed to recommend the transaction to Logica’s shareholders.

The deal has brought much surprise to the analyst industry, where managing partner for TechMarketView, Anthony Miller, said that he didn’t believe anyone would be “crazy enough” to buy Logica.

“We haven’t looked much at CGI since back in 2008 when they were apparently in the running to buy the SI bit of T-Systems. Other than that they haven’t appeared on our radar at all. Do they really know what they are getting themselves into, I wonder?” said Miller.

“Logica chairman, David Tyler, described Logica in today’s announcement as having ‘successfully integrated its European business into a single organisation with a clear brand and position in its main markets’. I wonder if I’m looking at the same company.”

TechMarketView attributed much of Logica’s troubles to its appointment of Andry Green, an ex-BT Global Services exec, as CEO in October 2007. On the day of Green’s appointment Logica’s share price closed at 164p, which has since declined by 36 per cent.

This is in contrast to the FTSE SCS Index, which has actually increased by 36 per cent over the same period.

Richard Holway, chairman at TechMarketView, questions whether it is wise for CGI to acquire a company larger than itself.

“CGI has very little revenue overlap with Logica’s UK and European operations. However, this is a huge acquisition for CGI,” said Holway.

“Acquisitions where the company being bought is more than 50 per cent of the size of the acquirer almost always fail. CGI is actually smaller than Logica. On top of that, CGI is not exactly a star performer – itself reporting declines in revenues and profits yesterday.”

Holway said that his reaction to the deal is one of “major sadness as yet another of the large and long established names from the UK’s strong technology background is acquired by an overseas predator.”

Logica joins a long list that includes Hoskyns, SD-Scicon and CAP. The UK now has no UK-HQed pure SITS players in the top ten suppliers to the UK market, said Holway.

“It really could have been so very different. This is not a case of blaming ‘market conditions’,” said Holway.

“This a failure of execution. The result – apart from some terrible returns for shareholders – is the loss of another part of the UK’s fine tech heritage.”

Tom Reuner, principal analyst at Ovum, had a more positive view of the acquisition, stating that the companies’ portfolios are complimentary.

“Logica has long been muted to be an acquisition target after challenges in execution and cost structure. Given the pressure on its share price after the last earnings announcement, the move is hardly a surprise. More of a surprise is the company who announced its intention to acquire one of the last British IT stalwarts. Geographical scope and portfolio are complimentary. Both organisations have a strong focus on financial services and public sector and both are deeply entrenched in BPO,” said Reuner.

He added: “In these verticals the new organisation has the potential to become a leading global player, but the challenges will lie in the integration and the cost structure, given that both organisations have only limited global sourcing capabilities. The context for the announcement is the relentless consolidation and the need for scale to compete.”

“More moves are likely not least because of the turbulences of the financial markets. India based providers have made a lot of noise of eyeing acquisitions in Continental Europe. But as with CGI, the bidder might not always be the obvious choice. And last but not least, a bidding war as with Axon should not be ruled out.”

Earlier this year the Government Procurement Service announced that it had signed a £500 million, four year deal with Logica to provide it with HR, finance and IT services, in a bit to centralise procurement.

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