The warm reception to news that software and services provider Logica Plc will merge with Anglo-Dutch rival CMG Plc, is likely to spur further consolidation in the European IT services sector.
Logica shares rose 12% and CMG shares rose 14.5% in early morning trading on the London Stock Exchange following the news that the two London, UK-based companies plan to merge to create a $3.14bn European IT services giant, prompting speculation that its rivals will be pushed into similar moves to remain competitive. The market value of the combined business rose to $2.09bn in mid-morning, up from $1.5bn when merger discussions were first announced on October 8.
Speaking at a press conference to announce the new LogicaCMG, CEO for CMG Alistair Crawford said: Customers want to drive down costs, create more efficiencies, internationally. They don’t want to use 15 different IT services suppliers, but around four. We will be among them, which means someone else won’t, and middle ranging companies will start to struggle.
The Logica-CMG tie-up creates Europe’s sixth largest IT services group with combined annual revenue of 2.05bn pounds ($3.14bn) based on 2001 sales, and a workforce of about 24,000 people. Under the terms of the all-share deal, Logica will hold a 60% stake in the combined LogicaCMG business, in return for CMG taking a 40% stake. Logica’s managing director and CEO Martin Read will become the CEO of the merged business, CMG’s executive chairman Cor Stutterheim, will become non-executive chairman, while Logica’s group finance director Seamus Keating will retain the role in the new company, and CMG CEO Alistair Crawford will become CEO for mainland Europe.
The management were at pains to point out that the deal would not be seen as an acquisition of CMG by Logica, and Stutterheim said: Some would consider a merger as a defensive or offensive move. Compare the deal to a football team, which is no good without a proper defense and attack. It will enable us to compete better against other major players in this league.
However, one of the reasons for the merger is to cut costs at the two ailing businesses. Logica said it would be axing 6% of its combined workforce, or around 1,440 staff to create annual savings of 60m pounds ($93.6m). And the company said it expects to take an 80m pound ($124.8m) charge, of which 60m pounds ($91.8m) will cover severance costs, and 20m pounds ($31.2m) will cover restructuring such as office closures.
One of the areas to come under the knife will be Logica’s German operation, which it grew significantly through its $556m October 2000 acquisition of system integrator pdv GmbH. The company has already taken a 261.2m pound ($407.5m) write-off against the business in its full year to June 30, and did not rule out more to come. CEO Martin Read said: When you put the maps together, in some areas there is more scope for savings. In Germany we can truly rationalize…We are enthusiastic about our business in Germany, but got caught out by the downturn.
However, Read said there are few overlaps between the two businesses, claiming that both companies are strong in SAP consulting, but CMG puts more emphasis on HR products and services, whereas the majority of Logica’s skills are in SAP. CMG has about 1,200 Oracle-trained consultants, an area where Logica is considerably smaller, and Logica has been successful in systems development, such as fraud detection, whereas CMG claims to be strong in Basel II and banking systems, where it hopes to increase its presence through an alliance formed in June with French IT services firm Sopra Group.
The major area for scrutiny is in the fiercely competitive multimedia messaging system (MMS) space, where the two companies have competed until now in developing and integrating software that enables mobile users to send interactive picture messages across their handsets. Crawford said that together Logica and CMG would be able to make cost savings and compete against Ericsson and Nokia, which have won significant projects with major vendors like Orange, Vodafone and MM02. Content has to be delivered to subscribers and this requires very complex system integration, and we believe there is a market for an independent company doing this, he said.
One of the major problems will be merging the cultures of two large people based organizations, which have very different management philosophies. CMG for example, operates an open policy across its business, where any employee is able to view the personnel files of their co-workers, giving free access to pay related information. They also wear suits and ties to work, a policy not enforced at Logica. Read said: Golly, this is something we will have to work through. There are opportunities for both companies to rethink things that have been going on for some time… Mergers of this scale are tricky beasts, but we will operate as one company from the start and minimize disruption.
Consolidation in the IT services market in 2002 has been hotting up since IBM Corp’s $3.5bn acquisition of management consultancy PwC Consulting in July. The continuing pressure on IT services firms to generate positive cash flows, revenue and profitability in the depressed economic environment is putting pressure on others to follow suit. Logica expects the merger to propel the company into the top tier of IT services providers in Europe, capable of bidding for and winning some of the largest system integration and consulting projects.
European mid-size players look particularly vulnerable as a result, and Robert Morgan, chief executive of outsourcing consultancy Morgan Chambers told us earlier this month he expects a number to be swallowed up in a wave of consolidation: ITnet is extremely vulnerable, and despite Capita’s success, it is still relatively small and would be an ideal acquisition opportunity for a company wanting a UK government business. He also believes that Pink Roccade, the largest outsourcing provider in the Netherlands, and outsourcing firm Xansa will be prime acquisition targets.