"CGI shares reach record high - Surge powered by rumours of U.S. acquisition; stock is up 705% over past year"
By Carolyn Leitch, Investment Reporter (Toronto Globe & Mail - July 3, 1998)
Shares of CGI Group Inc have soared 30 per cent in the past five trading sessions on rumours that the Montreal-based computer services company is on the verge of buying a U.S.based company.
CGI class A shares touched a record high of $34.85 on the Montreal Exchange yesterday before easing off to close at $34.85, up $2.85 from Tuesday's close. The shares ended the day at $26.25 on June 24.
Analyst Jean Sylvain Labbe of Desjardins Securities Inc. in Montreal said rumours that CGI is close to an acquisition appear to be fuelling the stock's rise. He added that CGI was also thrust into the spotlight last week when the Montreal business weekly Les Affaires named it company of the year.
Mr. Labbe said the purchase of a U.S. concern would be a "significant" move because the Canadian company has only a small presence south of the border.
CGI spokesman Ronald White said he does not have specific information about an imminent acquisition. But he acknowledged that CGI chairman and chief executive officer Serge Godin told shareholders at the company's annual meeting this week that CGI is shopping for a new business, which will most likely be in the United States.
Mr. Godin has also said that he would like the company to expand its presence in providing information technology services to the insurance industry. Last year CGI bought ISI Systems Inc. of Andover, Mass which provides information technology services to the property and casualty insurance industry.
Now CGI is on the lookout for entree into the life insurance side the business, Mr. White said, adding that the company receives about 12 per cent of its revenue in the United States.
Mr. White said shareholders were also feeling positive this week after they voted in favour of CGI's purchase of BCE Inc.'s computer systems unit, Bell Sygma, which will boost CGI's revenue into the $1-billion range.
Under the two-part agreement struck in January, BCE also boosted its stake in CGI to 43 per cent from 23 per cent and said it may raise the stake to as much as 56 per cent.
Toronto-based analyst Josef Vejvoda of Levesque Beaubien Geoffrion Inc. said investors have "a warm and fuzzy feeling" generated by this week's positive news. He added that for CGI, a move to beef up its U.S. presence makes sense.
"They have to move to the U.S. That's the biggest playground for outsourcing." He added that telecommunications, financial services and government will all be important sectors for CGI as they increasingly move to hand off their computer systems to the care of specialists.
Mr. Vejvoda said speculation has also been circulating in the financial community that CGI will soon announce a major contract. He said a large chunk of new business would require more workers, which could turn lead to an agreement to buy another company. "When you make acquisition, you're buying bodies, and that's what they need." At the same time, he said, purchasing a new unit would likely lead to new contracts.
Last month, CGI raised the estimated value of its 10-year contract with BCE's Bell Canada unit by $1.5 billion to $4.5 billion. Mr. Vejvoda said that estimate is likely conservative, and be believes CGI win even more contracts over the next several years from companies linked to BCE, which is Canada's largest telecommunications company.
Mr. Vejvoda rates the stock "buy" with a 12-month target price of $40. Mr. Labbe rates the stock a "buy" with a two-year target price of $35. "We know that this is amazingly conservative and they will exceed it."
Investors who bought CGI shares one year ago have already reaped stunning return of 705 per cent. The stock is the best performer on the Toronto Stock Exchange companies index of 300 stocks in 1998, with gain so far this year of 193 per cent. The dizzying ascent has prompt the company three times in the past year to split the stock two-for-one.
[Caveat - article was scanned, errors may be mine]
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