The past six months have seen many of the remaining large IT suppliers in the UK acquired by foreign companies. In August 2011, Hewlett-Packard acquired information management software provider Autonomy, while earlier this year banking software vendor Misys was bought by US private equity firm Vista Equity Partners.
In addition, in May 2012, the largest UK-owned IT services provider, Logica, received an acquisition bid from Canadian counterpart CGI. The offer, which values Logica at £1.7 billion, was approved by the company’s
board of directors and is awaiting shareholder approval.
The combined company would have 73,000 employees, annual revenues of £6 billion and operate in 43 countries. CGI has virtually no presence in Europe, but “expansion into Europe has always been part of our strategy”, CEO and president Michael Roach said when announcing the deal.
The takeover bid follows troubled financial times at Logica. Last year, it grew revenues by just 3% to £3.9 billion and its operating profit fell by 74%. In December, the company announced 1,300 job cuts, around 3% of its workforce, in order to cut costs by up to £60 million.
Nevertheless, the acquisition bid came as a surprise for Anthony Miller, managing partner at UK IT industry analyst company TechMarketView, who has been tracking Logica for many years.
“I was absolutely gobsmacked,” he declares. “I’ve long been saying that I didn’t think anyone except private equity would have the gumption to acquire Logica.”
All European IT services providers have been struggling in the face of the European economic crisis and the decline in government IT spending across the continent. But Logica has been especially slow to adapt to the changing circumstances, says Miller.
The company as it stands today, he explains, is the result of a number of ambitious acquisitions, notably the merger of Logica and Dutch-owned CMG in 2002 and the acquisitions of Portugal’s Edinfor in 2005 and France’s Unilog in 2006.
“When [current CEO] Andy Green came on board in 2007, he had a magnificent opportunity to knock Logica into shape,” says Miller. “But he has failed to do the most essential thing for any IT services firm in the current environment: build up its global delivery network, particularly in India.”
Logica has just over 4,000 employees in India. “That number should be 10,000 or more,” says Miller.
Green’s failure to boost offshore resources when times were good means that when government spending hit a wall it was unable to ramp up its private sector business, says Miller. “To do that you need offshore delivery, otherwise you can’t compete or your profitability will go down the drain.”
Logica’s operational delivery has also left something to be desired, he says: “They haven’t got operational delivery right. They are still having problems with overrunning contracts because their service delivery processes are not up to par.”
The company has appointed a string of executives with responsibility for improving operational delivery in recent years, Miller says, but they invariably move on to other posts within months.
With a 12% operating margin, compared with Logica’s 6.5%, CGI seems to have its delivery in better shape. However, the Canadian company will have its work cut out imposing its culture and service delivery processes on Logica, says Miller.
“Logica is not one culture,” he says. “CGI’s way of doing things might meld very well with Logica’s French operations, and conceivably the UK division, but the Dutch business and the Nordics? All of these have different cultures.”
“There’s plenty of opportunity for this acquisition to be a catastrophe,” Miller says. “There are few examples of companies successfully acquiring businesses that are any bigger than 50% of their size. And Logica is more than 50% bigger than CGI.”
Miller believes that the acquisition of Logica is a “sad, sad, indictment of what has been allowed to happen to the UK IT industry. When Logica goes, there won’t be any UK-owned sizeable IT services companies left, and that’s
So why have so many of the industry’s biggest and brightest names passed to foreign ownership? “It is certainly not because of a lack of talent, ambition, capability or innovation,” says Miller.
“One reason is arguably that the UK market is so open from a mergers and acquisitions point of view,” he adds. “That’s a good thing – we all want a free market – but it does mean that any company with large enough pockets
can buy what it wants, which is what has happened."
There is also the fact that, unlike the US, Europe is not a single homogeneous market that allows companies to reach sufficient scale as to be independent. Miller points out that continental companies such as French IT services providers Atos and Capgemini and German business applications vendor SAP have managed to remain independent, although “there’s been a lot more protection – both overt and covert – for core industries in France and Germany”.
Thirdly, he says, “a lot of the blame can be put at the door of the top management of these companies, for not knowing how to build great businesses”.
Miller’s first recommendation for CGI, should the acquisition go ahead: “Get rid of Logica’s top management entirely.”