The deal for its larger competitor makes the Montreal company the sixth largest services firm in the world

U.K.’s Logica goes to CGI for $2.6 billion

CGI Group, a Canadian IT services and business process services company, has agreed to acquire its larger European competitor Logica for £1.7 billion (US$2.7 billion) in cash, in a bid to expand its European presence, the companies said Thursday.

The combination of the two companies is expected to create an IT services player with a presence in North America, Europe, and Asia.
Scale has become an important factor in cost competitiveness and service as the industry has become more competitive and globalized, the companies said. In Logica’s main European markets, there is considerable economic uncertainty, which affects confidence and demand from both public and private clients.
 
Mark Schrutt, director of IT services at IDC Canada, said the deal will bolster the ability of CGI to offer its portfolio of services in Europe. Logica has solutions for the oil and gas industry, earth observation technologies (such as satellite navigation resource management for utilities) and has off-shore resources that could be a “good complement of technology” for what CGI already has , Schrutt said.
The move also fits in well with CGI’s attempts to “bundle” its IP (intellectual property) based solutions, he added. “They’re trying to expand that base of IP solutions to the marketplace because the IP market overall is heading in an as-a-service direction,” he said.
“It brings to them a significant base of prospects and customers that they could cross-sell these IP solutions to in Europe. “
With some 31,000 professionals located in Canada, the U.S., Europe and Asia Pacific, CGI’s annualized revenue as of March 31 was about C$4.3 billion (US$4.2 billion) with an order backlog of about C$13 billion. For the twelve months ended Dec. 31, Logica in Reading, England, reported revenue of £3.9 billion. The combined company will have about 72,000 professionals in 43 countries and revenue of C$10.4 billion.

Earlier this month, Logica forecast that 2012 revenue could grow or shrink — but by no more than 2 percent — while the operating margin will be above 6.5 percent even in tough market conditions.

TechMarketView, a research firm in the U.K., said that Logica had been hit by a failure in execution, resulting in “the loss of another part of the U.K.’s fine tech heritage.” Logica is larger than CGI, and acquisitions where the company being bought is greater than 50 percent of the size of the acquiring company almost always fail, said Richard Holway, chairman of the research firm.

The acquisition also comes at a time when key services companies, including low-cost Indian providers, are facing a slow-down in growth in the market as a result of the debt crisis in Europe and the slow recovery in the U.S.

Gartner said in April that the IT services market would grow by 1.3 percent to US$856 billion this year, down from 6.5 percent growth last year.

Information Services Group reported in April that its TPI Index, which covers commercial outsourcing contracts valued at $25 million or more, measured total contract value of US$18.7 billion in the first quarter, a decline of 22 percent from the same quarter a year ago. The advisory and research firm characterized the drop as the industry taking a breather after two quarters of robust growth. Other research companies however continue to report a pull-back in decision making by customers in an uncertain environment.

The acquisition will be made through CGI’s European subsidiary. Logica’s board of directors has unanimously agreed to recommend the transaction to its shareholders.
 
(With files from Brian Bloom, ComputerWorld Canada).
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