Excellent full-page article in Saturday's Financial Post including photo of top brass and 12 month stock chart.
"Safe in the arms of Ma Bell"
"CGI had a good thing going, but after its deal with BCE and merger with Sygma, it's doing even better"
by Robert Gibbens for the Financial Post - January 10, 1998
MONTREAL -- Rapid growth is nothing new in the high tech sector, but this week CCI Group Inc. made what can only be construed as a quantum leap. Telecommunications giant BCE Inc. agreed to up its interest in the company to 4396 from 23% and to merge its Sygma domestic and international information services unit into CGI.
That will make the 21-year-old information systems company Canada's biggest computer consulting, systems and outsourcing group as well as a sizable player in the U.S. and Europe.
When the deal is completed on June 30, CGI's market capitalization will top $1.5 billion. Revenue will double to over $1 billion, 75% of which will come from developing and managing computer systems for corporations and the public sector, and the order backlog will triple to $4.5 billion.
But for CGI chairman and CEO Serge Godin, this is just the start of something even more ambitious. "Our relationship with BCE will follow the model of Northern Telecom Ltd., its 52%-owned telecommunications unit" says Godin. "We'll be BCE's Nortel of the information technology business with similar autonomy and a strong mandate to grow. We won't have Nortel's muscle at the BCE table, but BCE knows the North American and European outsourcing market alone has a 30% growth rate through the year 2000."
Godin says CGI's closely knit team can manage the merger with Sygma smoothly and without disrupting its existing national network of data centres and consulting offices. CGI has facilities in virtually every city across the country while Sygma has a strong presence in Ottawa, Toronto and Montreal.
"There'll be change and some problems at first and we must adjust to larger and more complex contracts," Godin says. 'But we've done well over a dozen acquisitions since we started in Quebec City and each added to our existing operations."
Despite some industry criticism, Sygma's operations are well managed and efficient, he says. 'BCE is not unloading Sygma on CGI, but concentrating all its efforts on its core telecommunications business as competition intensifies and the age of convergence approaches."
From CGl's standpoint, the closer relationship with BCE has an overriding benefit. It will have a $3-billion, l0·year contract to manage the modernization and operation of Bell Canada's computer systems at guaranteed rates. Godin says ' this will lead to more business with other BCE units and help the company spread its costs over a wider base and move its net margin up from about 4% to nearer the 6% to 8% score of the leading U.S. firms.
Getting this far hasn't been easy for Godin and many of his early public shareholders. CGI (GIBa/TSE, ME) went public in 1986 at $6.50 a share at the height of an IPO boom, only to see the share price sink below $1 after Black Monday in October 1987.
It didn't get back to $6.50 until late 1995 when Bell invested $18.5 million for a 24% equity stake. It put in another $43.5 million last October to maintain this after CGI issued stock for acquisitions.
"We were trying to build a national presence step by step and were determined to expand our outsourcing business," says Godin. "We knew what to do, but we couldn't finance it. That initial Bell Canada investment opened up new vistas, bringing us near the $100 million threshold needed to attract institutions' and analysts' attention."
Growth by acquisition since has been explosive. CGI gained a solid following and large shareholders including Caisse de depot et placement du Quebec, the Quebec pension fund manager, the Ontario Municipal Employees' Retirement System and Fidelity Investments.
In the past year alone, rising revenues and profits have sent its publicly traded A shares to $27 from $2.69, allowing for two stock splits. This week, the shares touched a new peak of $28 as the market responded favorably to the Sygma merger and BCE's acquisition of more shares.
It won't end there. BCE will be able to raise its stake to 56% from 43% by buying non-trading class B CGI shares from the three founders -- Godin, Andre Imbeau and Jean Brassard -- over the next six years. The class B shares now held by the senior management group each carry 10 votes, but by 2003 they will carry only a single vote and be equal the publicly traded A shares.
"BCE came in just when the DMR Group Inc. and SHL Systemhouse Inc. had been sold to American groups for several hundred million dollars," says Godin. "We decided BCE was right for CGI and its staff, most of whom have at least-12 years' service and are shareholders. Management is in place for at least six years and an orderly succession is sure for the founders."
CGI is known for its low-key management style and the reticence of its three founders. But the company ranks as an entrepreneurial success, starting in 1976 when the Laval educated Godin decided working for a Quebec City computer service company wasn't good enough. "I wanted to build a big independent computer consulting and service business." he says, and he soon convinced Imbeau, an old high school friend, to join him. Two years later, Brassard, who gave the pair their first government contract, left Quebec's civil service to join what became CGI Group Inc.
Godin, now 48, is chairman and chief executive. He's the strategist who sets general direction, but all major policy moves are joint decisions involving Brassard, the 53-yearold operations specialist, president and chief operating officer, and Imbeau, 48, who's executive vice-president and chief financial officer.
CGI is openly boastful about its operational successes. Brassard, for example, notes the company has the highest client and staff retention record in the industry. He adds that CGI's profit-sharing and share-purchase plans will ease the integration of some 3,000 Sigma staffers.
CGI is not without flaws. Computer service companies have a record of making expensive proposals, and the chief executive of one retail distributor says CGI is no exception. "But they sit down with you and work out a system you can afford with flexibility, and they do deliver," he adds.
More important, some analysts question whether CGI can keep up the quality of service after two years of massive expansion. They worry it may lose some existing contracts because of its BCE affiliation. "Outsourcing contracts worth hundreds of millions each and running five or 10 years can be difficult to manage, and clients can change their minds because of new technology and want to renegotiate after three years," says one analyst. "Your systems consulting team can be left waiting in the lobby.
Any such doubts seem minor compared to the euphoria surrounding the deal between Godin and BCE president Jean Monty on Jan. 2.
Monty pointed to the very obvious future when he said a "clean path to majority control is critical and BCE expects to get a bigger share of CGI's rising profits."
The mechanics of the deal go like this. Effective June 30, BCE sells its Bell Sygma unit to CGI for 8.6 million CGI shares worth about $198 million (value $22.98 a share). BCE is also buying six million CGI shares held by Teleglobe Inc. for $138 million ($22.98 a share). Overall, that raises BCE's stake in CGI to 43%.
CGI is now part of the TSE 300 and TSE 200 indexes. "I hope the BCE deal does not end up crushing CGI's entrepreneurial spirit and CGI continues as an autonomous unit like Nortel," says Douglas Cunningham, a communications analyst with Midland Walwyn Capital Inc. in Toronto. "BCE reduces its back-office costs, gains from CGI's better marketing and ability to outsource more efficiently than Sygma."
Several analysts say CGI's present stock price multiple of about 35 is justified by the company's growth prospects, and have raised their medium-term targets to $34 to $40.
Dennis dos Santos, an analyst with Marleau Lemire Securities Inc. in Toronto, has a "buy" on CGI shares based its growth strategy (with a priority or U.S. acquisitions), its profitability and its trading liquidity. He estimates pro-forma CGI revenue will be $840.1 million and net income $45.4 million (72c a share) for the year ending Sept. 30. Average shares outstanding will be 63.5 million.
He thinks 1999 revenue will be $1.1 billion and net income $62.5 million (95c) on 65.6 million shares, and year 2000 revenue will be $1.25 billion and net income $74.5 million ($1.14).
CGI's actual revenue in 1997 was $232 million and net income $7.8 million (20c).
But the full impact of rolling Sygma into CGI will come in the final quarter of fiscal 1998, says Anthony Zicha analyst with Deacon Capital Corp. in Montreal. He puts 1999 net income at $1.07 a share on revenue of $1.33 billion.
The merger means CGI will earn 39% of its revenue from the telecommunications sector, 37% from financial services, 9% from government contracts, and the rest from manufacturing, distribution and other sectors. |
