CGI Has $1.1 Billion to Hunt for Acquisitions: Corporate CanadaFrederic Tomesco
CGI Group Inc. Chief Executive Officer Michael Roach says Canada’s biggest technology company is considering more acquisitions after completing the C$2.7 billion ($2.7 billion) purchase of Logica Plc.
“We never like to take any levers off the table,” Roach said in a Jan. 30 interview in Montreal. “We have to maintain an opportunistic posture in case an asset comes along that is a good fit and wouldn’t be there in the future.”
CGI, whose shares rose to a 12-year intraday high of C$27.03 yesterday, has about C$1.1 billion in cash to invest in takeovers, pay down debt or buy shares, said Roach. The Montreal-based supplier of technology and consulting to banks, retailers and utilities has a market value of C$8.2 billion, 22 percent greater than BlackBerry, the Canadian smartphone maker formerly known as Research In Motion Ltd.
CGI’s 16 percent gain in 2013 compares with a 2.7 percent advance for the benchmark Standard & Poor’s/TSX composite index. CGI dropped 0.5 percent to C$26.63 by 4 p.m. in Toronto today.
While insisting “profitable organic growth” remains the best use of cash for the company, Roach said he’ll keep looking at potential deals to improve CGI’s competitive position.
Roach and Chairman Serge Godin have spent at least $6 billion in the past decade buying more than 20 companies, gaining scale to compete with the likes of International Business Machines Corp. in selling information technology services. CGI has purchased more than 70 companies since its foundation in 1976, Godin said in May.
Investors such as Christian Godin, a fund manager at Montrusco Bolton Inc. in Montreal, would rather see the CEO concentrate on making sure his most recent deal is a success.
“I’m not expecting any large acquisitions, and I would be surprised if they did one in the next year,” said Godin, who holds CGI stock among the C$2.5 billion in Canadian equities he manages. “As a shareholder I hope that they focus on good management. They have to optimize Logica’s operations.”
Severance and other integration-related costs at Logica led to a 79 percent drop in fiscal first quarter net income, CGI said Jan. 30. CGI in August completed the purchase of London-based Logica, whose addition triggered a 145 percent jump in first-quarter revenue -- to C$2.5 billion.
CGI’s announcement that it booked C$2.85 billion in first-quarter new orders, more than double the C$1.39 billion recorded in the same period a year ago, eased concern about Logica’s contribution, said Maher Yaghi, an analyst at Desjardins Capital Markets in Montreal.
“We have seen a significant step in the right direction with the Q1 results,” Yaghi said in a telephone interview. “Bookings do portend improving results going forward. There is a sigh of relief that Logica is not declining anymore.”
CGI said this week it was renewing a plan to buy back as much as 20.7 million shares by February 2014. Based on yesterday’s closing stock price, the plan could cost as much as C$554 million.
Asked whether CGI is studying potential deals, Roach said “there’s always something out there. You need the right target, the right price and the right time, and we don’t settle for two out of three. It has to be all three.”
CGI isn’t losing sight of Logica’s integration -- a three-year process that is ahead of schedule, Roach said. The company is targeting annual savings of C$300 million from moves such as the closing of Logica’s London headquarters.
More than 1,000 jobs had been cut at Logica by the end of 2012, and “we still have more to do,” the CEO said. CGI won’t release a job-cut target because “in a services business, frankly it’s very damaging in terms of the people’s morale,” Roach said.
CGI has incurred C$263 million in integration costs since completing the purchase of Logica, which has about 41,000 employees. The company expects to spend C$400 million on the restructuring over three years.
“Logica is a big piece to chew on, and I would feel that the risk in the company would increase significantly if they do undertake another major acquisition until they have run through the restructuring and started to see accretion,” said Yaghi at Desjardins. “Doubling the company’s size is already a big step, so investors are not pushing them to undertake an acquisition in the short term.”
Excluding acquisition- and integration-related costs, CGI expects per-share earnings to rise 25 percent to 30 percent this year, Roach told shareholders in Montreal Jan. 30.
On that basis, per-share earnings will probably climb to C$2.03 this year and C$2.43 next year from 2012’s C$1.50, according to the average forecasts in a Bloomberg survey of analysts.
Caisse de Depot et Placement du Quebec, CGI’s biggest shareholder, plans to remain a “long-term” investor in the company, CEO Michael Sabia said Jan. 29.
The Caisse owns 25 percent of CGI’s outstanding shares, having invested C$1 billion in the company last year to help finance the Logica deal.
“Are we convinced that CGI is going to be able to integrate Logica?,” Roland Lescure, the Caisse’s chief investment officer, told reporters in Montreal. “Their track record on acquisitions is strong enough that we can answer yes.”
That long-term support is precisely why Roach said he plans to start wooing other institutional investors, such as pension funds, to convince them of building up stakes in CGI.
The Caisse “is exactly the type of investor we want to attract into our stock,” Roach said in the interview. “Patient capital is important. We are still building out our company. We want to be able to manage our business over the long haul, make decisions now that will pay off in the future.”