CGI thinks big with AMS purchase

CGI Group Inc.'s planned purchase of American Management Systems Inc. will create a major new player in the U.S. outsourcing arena. Montreal-based CGI, which derives three quarters of its revenue from outsourcing-related work, is counting on the acquisition of AMS, a company known for its software and consulting expertise, to enable it to compete against first-tier systems integrators for state and local government contracts. CGI announced March 11 that it is acquiring AMS' commercial and nondefense government business for $858 million. As part of the deal, Arlington, Va.-based CACI International Inc. is buying AMS' U.S. Defense and Intelligence Group for $415 million. Consequently, CGI's net cost is $443 million. CACI will purchase the unit directly from AMS, and CGI will receive the money through its purchase of the remainder of the company. The deal will go through regulatory review and is expected to close in May.Analysts and industry experts said they believe CGI's strong balance sheet and AMS' market presence will enable CGI to substantially grow its U.S. government business."The combination could propel the new CGI-AMS to compete for mega-outsourcing deals," said Tom Davies, senior vice president at the market research firm Current Analysis Inc., Sterling, Va."This might be the making of a North American powerhouse," said Ray Bjorklund, senior vice president and chief knowledge officer with market research firm Federal Sources Inc., McLean, Va. When the acquisition closes, CGI plans to go head to head in the U.S. government market against the large integrators it already competes with for Canadian government and commercial deals. These include Accenture Ltd., Hamilton, Bermuda; IBM Corp., Armonk, N.Y.; and EDS Corp., Plano, Texas.CGI provides e-government infrastructure support to the Canadian government, information technology outsourcing to Canada's Justice Department, IT outsourcing services to the U.S. Interior Department, e-government services to the Georgia Municipal Association, and IT services and support to a number of New York state agencies, including the departments of Civil Service, Environmental Conservation and Labor and the Insurance Fund.The acquisition will make CGI "a billion-dollar player in the United States," said Serge Godin, CGI's chairman of the board and chief executive officer.Godin also will serve as chairman and CEO of the combined entity, which will be known as CGI-AMS in the United States. Alfred Mockett, chairman and CEO of Fairfax, Va.-based AMS, will remain with the company until the acquisition closes, and then step down, said Eileen Murphy, a CGI spokeswoman.CGI, which has acquired 55 companies over the past two decades, focuses on buying companies with good brands and deep relationships around which CGI can build new business, said Michael Roach, CGI's president and chief operating officer."We look over time to extend those relationships into long-term relationships [and] long-term outsourcing," he said. With the purchase of AMS, CGI will increase its revenue by 50 percent to about $3 billion, and more than double its government sales from $321 million to $732 million annually, Roach said. CGI will pick up about $700 million in additional revenue as a result of the deal, and add 4,800 employees to its staff of 20,000. CGI picks up U.S. customers in 44 states and more than 200 local governments through the deal. The acquisition will enable CGI to capitalize on both AMS' U.S. government customer base as well as software targeted for the parent company's key offerings, particularly financial services, telecom and government and health care.CGI is buying AMS to expand its geographic base, strengthen its market capabilities and increase its client base, Roach said. "We want to significantly increase our footprint in the United States and Europe," he said.The company has had considerable success providing outsourcing services and e-government solutions to the Canadian government, said John Kost, managing vice president of worldwide public-sector research for Gartner Inc., Stamford, Conn. But the growth opportunity is limited because the Canadian market is only a fraction of the size of the U.S. government market, he said.The proposed acquisition shows that CGI "has been successful enough in its home market to move into another market by acquisition," Kost said. "The U.S. market is so large, it can handle literally hundreds of IT services firms."[IMGCAP(2)]The company initially will be branded as CGI-AMS in the U.S. market to dispel any anxiety existing customers may have about the acquisition, Roach said. Analysts said keeping the AMS name is a smart move, because some customers may be nervous about the transition. Analysts expect the company to drop the AMS name in about 12 months.AMS revenue dropped from $986.7 million in 2002 to $961.6 million in 2003. Its declining revenue was largely a result of market conditions and not its performance, said Tom Meagher, vice president of equity research with BB&T Capital Markets, Richmond, Va. "If you look at Accenture and BearingPoint and some other companies, they were all having a tough time, particularly in the commercial business," he said. "I don't believe [AMS was] any different than anybody else out there to that extent."Although AMS had problems on several high-profile contracts in recent years in both the federal and state and local markets, the company's overall reputation was intact at the time of sale, analysts said. Mississippi won a $185 million settlement against AMS after the company failed to install a tax collection system on schedule. After that, the Federal Retirement Thrift Investment Board sued AMS for failing to properly install and manage a records keeping system for federal employees retirement accounts. "They never seemed to recover fully from the troubles they had with that state contract," said Jerry Grossman, managing director with the investment banking firm Houlihan Lokey Howard and Zukin, McLean, Va. "That was quite a blow for a proud company that had done so well for so long."Still, AMS' experience with Mississippi was the exception rather than the norm. "If the problems were really serious, they would have been left to their own devices," Bjorklund said.Staff Writer William Welsh can be reached at wwelsh@postnewsweektech.com.