CGI buys Logica: The analysts' grim predictions

The announcement that one of the UK’s last remaining software and information technology services companies, Logica, is set to be acquired by a smaller Canadian firm, CGI, has prompted harsh criticism from the analyst community.

The deal is worthan estimated £1.7 billion and represents a 59.8 percent premium on Logica’s closing share price the day before the deal was agreed.

However, analysts are saying that the deal highlights the failures of Logica’s management and that CGI will not create a new global business through integrating Logica’s European operations.

This will not create a new global player

Douglas Hayward, research director at IDC, for instance, questioned Logica chairman David Taylor’s predictions for the future of the company following the acquisition, where he said that it would ‘create a leading player in the IT services sector worldwide with a meaningful presence in the Americas, Europe and Asia’.

The combined operation of the two companies will be pretty much the same size everywhere, argued Hayward, just spread over more geographies.

He said: “Did Logica need a massively enhanced presence in Canada? Hardly. Does CGI really need a heavy presence in Europe to support its existing clients? No.”

“Haven’t we been here before? Given Logica’s abandonment many years ago if its former global ambitions (it improbably aimed to be a global Top 10 player in the days of former CEO Martin Read), it’s ironic if not worrying to see worldwide market leadership being resurrected as a drive of this deal.”

Logica’s Taylor also stated that the combined resources of the two companies would provide an ideal platform to serve clients locally and globally, to win larger scale outsourcing opportunities.

Hayward argues that this acquisition will absolutely not create a truly integrated global player with the scale to take on the HPs, IBMs or Accentures of this world in the short term. But what about the long-term? Hayward is still unsure.

He said: “That’s doubtful, unless CGI can act fast and ruthlessly without alienating Logica’s larger workforce. We’re not convinced that the two businesses have significant growth-centred operational synergies.”

“Add to this that Logica on its own has struggled to create a truly integrated European player and is more of a conglomerate of local companies. We wonder if CGI really grasps the size of the challenge.”

Hayward concluded that this “deal basically says that Logica’s management has failed and sees no way to grow enterprise value significantly over the next few years. The implication is that CGI can do a lot better. Can it? Let’s hope so.”

Wouldn’t touch it with a bargepole

Further criticism came from Anthony Miller, managing partner at analyst firm TechMarketView, who argued that just because Logica is ‘so cheap’ doesn’t mean it should be attracting interest from buyers.

He said: “I was always brought up to believe that just because something is ‘cheap’, that doesn’t necessarily mean you should rush out and buy it. Indeed, that is often the very reason you wouldn’t touch it with a bargepole!”

Miller questioned whether CGI’s president and CEO, Michael Roach, doesn’t understand the complexity of Logica’s operation, in that its European divisions essentially operate as separate companies.

He said: “He thinks he’s buying one company. In fact, not only does Roach think that, but so do the sell-side analysts in the eminent North American investment banks who track CGI’s stock and who [judging from the acquisition conference call] have little idea who Logica is, let alone what they do.

“They all seem to believe that Logica is a ‘European CGI’ –so ‘of course it will fit’. Well it isn’t. Logica operates in no fewer than 24 European countries and 19 others worldwide. Each has its own culture, language, sales and delivery processes, regulatory environment and economic head- and tail-winds. CGI isn’t buying one company – you could argue it is in effect trying to buy 43!”

Miller also doesn’t believe that the acquisition makes much financial sense for CGI.

“Please don’t get blinded by the brilliance of CGI’s 14.7 percent adjusted earnings before interest and tax (EBIT) margin. Its European operations enjoy an adjusted EBIT margin of 6.1 percent – pretty much in line with Logica’s 2011 adjusted margin,” said Miller.

“Do they think that if they add the two companies together then European margins will double? In fact Europe (including the UK) would comprise almost 60 percent of the combined business – you can do the margin calculations for yourselves.”

He added: “Folks, if this deal does go ahead, then ‘acquisition indigestion’ won’t even begin to describe the pain.”

Thanks for trying Andy

Telegraph business columnist Damian Reece also gave a scathing report on the acquisition, where he attributed Logica’s decision to sell to its current CEO Andy Green, who has struggled to deliver growth since being appointed in October 2007 and will have been feeling pressure from investors.

In fact, on the day of Green’s appointment Logica’s share price closed at 164p, which has since declined by 36 percent. This is in contract to the FTSE SCS Index, which has actually increased by 36 percent over the same period.

“Andy Green will walk away with £1 million having seen his plan for Logica fail. Oh well. Thanks for trying Andy. The 1,300 people he sacked in December no doubt felt their sacrifice was worth it yesterday as the company’s share price finally discovered the ‘up’ direction thanks to Andy’s brilliant notion of selling the company before another profit warning – albeit on the cheap,” said Reece.

“The fact that the share price of Logica’s buyer, CGI, rose as much as 19 percent on the news that it was paying only £1.7 billion for the company says it all. Having told us in December he’d never seen ‘such an extended period of uncertainty’, Andy was full of the ‘sense of excitement’ yesterday having married Logica off.”

Copyright © 2012 IDG Communications, Inc.

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