IDC skeptical about CGI’s £1.7 billion Logica buy

Reading based services company, Logica, has agreed to a sale by Canadian CGI Group for £1.7 billion, sending shares up 65 percent. Although the BBC points out that a rival bidder may come forward, IDC believes that the sell is a ‘surprise’ and that it is “taking the money and running”.

According to IDC, Logica has given up on trying to satisfy investors through profitable growth. In a statement, IDC wonders why Logica is selling out to a smaller company.

IDC quoted Logica chairman David Tyler, who said that competitive intensity increased as the industry globalised – with scale becoming an “ever more important factor in cost competitiveness and service”.

“In Logica’s main European markets there is considerable economic uncertainty,” Tyler added, “which affects confidence and demand from both public and private clients.” IDC sees it a different way, claiming that Logica “missed the boat” on global sourcing, while its low position on the pecking order and the industry value chain means the company is exposed to clients cutting back on services spending.

“Yes, one can see why Logica wants to sell out,” research director for European services at IDC, Douglas Hayward, said, “given the poor performance of its shares and a mediocre prognosis for the future”.

Hayward said that Logica does have its strengths, including some “great pockets of industry and technology expertise”, as well as long term local client relationships. He pointed out that IDC’s customer satisfaction surveys have rated Logica highly for service quality and technology skills, and this is something CGI must nurture and exploit.

“Yet compared to close competitors,” Hayward said, “relatively few of Logica’s customers reported the supplier outperforming their expectations, and the company is rarely seen as driving serious business change among clients”. IDC predicted four years ago that the marketplace for midsize players like Logica is increasingly harsh, and although Logica disagreed at the time, IDC did not think it could compete without adopting the think global, act local model which lends strength to Western suppliers.

CGI and Logica, according to IDC, is not exactly a match made in heaven. “Stitching together two regional players doesn’t make a truly global player,” Hayward said. “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.”