It was revealed this morning 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, in a deal worth approximately £1.7 billion.
The news prompted a mixed reaction from the analyst community, with some claiming that it is a shame that another UK company has been acquired by an overseas ‘predator’, whilst others suggested that the two companies’ portfolios are complementary and suited for integration.
According to Rachael Stormonth, SVP at analyst firm NelsonHall, Logica will bring CGI £1.1 billion worth of European public sector business, 37 percent of which is directly from the UK.
Furthermore, the proportion of CFI’s revenue coming from Europe will shift from five percent to 56 percent – more than half its business.
But what impact will this have on UK and European customers who have already penned deals with Logica?
Douglas Hayward, research director at IDC, has outlined three core areas that UK customers’ of Logica should be aware of.
This deal adds nothing
Firstly, he highlights that even though CGI is based in Canada and it is acquiring a European company, this does not make it a ‘global competitor’, as CGI had suggested in its acquisition announcement.
“Stitching together two regional players doesn’t make a truly global player. This deal won’t create a tier-1 player with the scale to take on HP, IBM or Accenture,” said Hayward.
He added: “For European public bodies and enterprises with little or no need for services outside Europe, this deal adds nothing.”
“It may eventually add something useful to the mix if CGI imports innovative and useful ideas and offerings from North America to Europe. But let’s see if that happens.”
Secondly, companies that already have contracts with Logica should be aware that there is an obvious risk of disruption to day-to-day service delivery due to staff contemplating their future within a company that is based in Canada, according to Hayward.
“Longer term, the question is whether CGI will want all of Logica, or whether it will divest or run down any service lines or geographies. We won’t know the answers to these questions until the dust settles on the deal, but for now Logica clients and prospective clients alike should assume that CGI wants the whole of Logica and continue with new tactical spend."
“But if you are considering a strategic new contract with Logica, be aware of the possible disruption and uncertainty," he said.
Finally, Hayward asked how the acquisition could improve Logica. He recognised that it has some great pockets of industry and technology expertise, and IDC’s enterprise satisfaction surveys have showed Logica’s clients giving it very high marks for service quality and technology skills.
Despite this, however, few customers reported it outperforming their expectations, and Logica, according to IDC, is rarely seen as driving serious business change among clients.
“It’s too often what we once called ‘a reliable, steady, technically skilled IT implementation outfit that does what it’s asked to do, but doesn’t think big, scary thoughts and that doesn’t drive its brand of aggressive business change among its clients,” said Hayward.
“Can CGI change that? We doubt it.”
Can't rule out a counter-bid
Hayward’s points, however, rely upon the assumption that the deal between Logica and CGI will go through. At this stage there is still an opportunity for an interested party to come in and usurp CGI’s offer with a higher bid.
Philip Carnelley, research director at Pierre Audoin Consultants, believes that this may not be the final outcome for Logica’s sale.
“CGI and Logica have almost no overlap in operations – so this is a very complementary move and indeed to makes sense on many levels. However we can think of several other IT services players who would also be a good, complementary fit,” said Carnelley.
Carnelley suggested that T-Systems, Fujitsu or Japan-based NTT all have the resources available and minimal overlap with Logica’s business to make it an investment that could be worthwhile to them.
He added: “So while the CGI bid is ‘agreed’ by both parties, we certainly wouldn’t rule out a counter-bid.”
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