CGI Founder Serge Godin (left) chats with CEO Michael Roach
Consolidation in the information technology services sector has some investors betting on a buyout of CGI Group Inc. . But the Montreal company says it plans to make its own acquisitions, spending up to $2-billion to expand.
Michael Roach, the president and chief executive officer, said shareholders will see more value in the company's "build-and-buy" strategy than they would if CGI itself were bought, and added that CGI has not been approached by any interested parties.
"As these consolidations take place, we're going to be a consolidator," he said in an interview.
Two years ago, the company said it aimed to double in size within five years and would rely on acquisitions for about half that expansion. But with the economic meltdown, CGI's revenue has been almost flat and it has not pulled the trigger on any new deals.
As a result, it remains a small player in an industry that is dominated by a handful of consolidating goliaths, which include International Business Machines Corp., Hewlett-Packard Co. and Accenture PLC.
Many investors have already made up their minds about CGI, believing that its future lies in the arms of major competitors. News Monday that Dell Inc. planned to spend $3.9-billion (U.S.) to buy Perot Systems Corp. has only reinforced the sentiment that CGI is ripe for a buyout.
The shares rose nearly 6 per cent on the Toronto Stock Exchange Monday, to a new high of $12.31 (Canadian), on takeover speculation. Yesterday, they held relatively steady, closing down 3 cents.
Just over a year earlier, Hewlett-Packard Co. paid $13.2-billion (U.S.) for Electronic Data Systems Corp.
Perot Systems - founded by Ross Perot, a former U.S. presidential candidate and founder of EDS - boasts a strong presence in government and the health care industry. Analysts have been quick to point out that CGI has also built a good business in these two desirable markets and they have been floating possible prices for a buyout of the firm.
Mike Abramsky of RBC Dominion Securities Inc. estimates that CGI could garner a 30- to 40-per-cent premium to its current price. Dell's willingness to pay almost 70 per cent above what Perot Systems' shares traded at previously highlights not only the industry's consolidation trend, but also CGI's attractive valuation, he said.
"Industry consolidation and hardware commoditization could raise the attractiveness of CGI as an acquisition candidate," he wrote in a report, naming Cisco Systems Inc., Microsoft Corp. and IBM as potential purchasers.
On Monday, Scott Penner of TD Securities Inc. increased his price target on CGI to $14 (Canadian) from $13 and maintained his "buy" recommendation. Richard Tse, of National Bank Financial Inc., calculated that CGI would be worth about $17.50 a share to a purchaser.
CGI, which continues to draw almost 60 per cent of its business from the Canadian marketplace, has paid off its debt and secured a $1.4-billion line of credit. It reported $272-million of cash at the end of last quarter.
CGI can afford to spend up to $2-billion on an acquisition. But the real factor is getting the right employees and customers, Mr. Roach said. CGI is looking at potential targets in the United States and Western Europe, with a particular interest in companies that serve governments and financial institutions, he added.
There are still good acquisition targets for CGI and, as a larger stand-alone firm, the company could benefit as a "pure-play, hardware-agnostic" vendor, Mr. Abramsky said. Where the service arms of companies such as IBM and HP often prefer to recommend their own hardware, CGI remains independent.
Paul Lechem of CIBC World Markets Inc. wrote in a research note that Dell's bid for Perot Systems ultimately has mixed implications for CGI.
"On the positive side, Perot's acquisition suggests that CGI could command a premium if acquired (although management's multivoting shares are an impediment). The negative is that CGI is itself looking to acquire - and this may now be more expensive."