In May, Canada’s largest IT player, CGI Group (TSX:GIB.A), reminded Canadian investors about the flip side of M&A.
On the heels of Canada losing billions in market valuation through the acquisitions of some of the country’s more promising middle-market techs, such as Miranda, 20-20 and Zarlink, CGI made a whopper of an acquisition, picking up London-based Logica Plc for $2.64 billion. After announcing the deal, CGI passed Research in Motion to become Canada most valuable tech stock.
Cantor Fitzgerald analyst Tom Liston says he likes CGI’s acquisition of Logica because it allows the Montreal-based company to offer its customers true global presence. While Liston says there is risk in making a European acquisition at this time, that risk is offset by the nature of Logica’s revenue base and the low multiple CGI paid for the company. In an report to clients Thursday, Liston initiated coverage of CGI Group with a BUY rating and $30 target.
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CGI was founded in Montreal in that city’s Olympic Year of 1976. The Company’s name is an acronym for Consultants to Government and Industry. Midway through 2010, CGI picked up Stanley, an Arlington, Virginia based systems integrator for a billion dollars. But the company was just getting started; on August 20th, CGI completed the Logica acquisition, which was the largest in its history. CGI Group now ranks as the sixth largest independent information technology and business process services firm in the world.
Liston says there a couple unlikely potential catalysts for CGI’s growth. The first is what he calls a “scarcity premium”. The Cantor analyst says M&A activity in the software and services sector will continue driving up the scarcity premium afforded to stocks not acquired. The other catalyst is a change in the competitive environment in India. Liston says accounting scandals, wage inflation and high turn-over are making Indian IT firms less attractive.
At press time, shares of CGI Group were down 3.2% to $25.19