Is the CGI-Stanley deal a sign of things to come?

I won't argue against the obvious positives of CGI Group’s proposed acquisition of Stanley Inc. for $1 billion.

For CGI, the deal makes enormous sense:

• The Montreal-based company was sitting on plenty of cash and ready access to capital. The strong Canadian dollar also made the United States an attractive place to buy.
• The U.S. market, particularly the government, also remains strong, though you can argue whether or not it is growing.
• CGI wanted access to defense and intelligence customers, and Stanley brings that in a big way.
• CGI and Stanley have complementary capabilities in information technology and outsourcing.

For Stanley, there also are good reasons to be acquired:

• A very good price. A 23 percent premium is hard to argue with, particularly in today’s economy. The questions Stanley’s board had to answer were: Will our share price go up that much in the next year or two? Will the value of the company be greater if it remains independent?
• Becoming a part of a larger company with an international presence and deeper pockets.
• Because the vast majority of Stanley’s business represents new customers for CGI, Stanley’s people remain in their jobs. They likely won’t get new supervisors or chains of command to report to.
• At the same time, CGI brings federal civilian, state and local, and commercial customers that are new to Stanley. If an employee wants to stretch and try a new market, there should be plenty of opportunities.

So why is this deal a sign of tough times?

In my thinking, I keep coming back to the conversation I had with Ray Bjorklund, FedSources chief knowledge officer and senior vice president, about this deal and his presentation at the FedSources 2010 Outlook conference.

Bjorklund’s analysis shows that government contracting will shrink over the next several years. Federal IT spending, the market for CGI and Stanley, is growing, but just by a couple of percentage points.

The boom years of the past decade are over for government contractors.

Think about the comments coming from Defense Secretary Robert Gates that real cuts have to be made in defense spending. The targets will be the large weapon systems, so the immediate impact will be on the large defense primes.

Driving all this, of course, are the budget deficits and debt that has accumulated fighting two wars and a world economy that is still shaky.

The result is that the competition in the government market is going to get tougher. There will be fewer new contracts -- hardly any, according to Bjorklund. This will most likely give the advantage to incumbents, so it will get even harder for companies to organically grow into new markets.

This is the underlying subtext that created the conditions for a CGI-Stanley deal.

I’m not saying that either company was struggling -- quite the opposite. CGI and Stanley both had strong growth. CGI has been looking for a defense-related acquisition for some time. Stanley had been making acquisitions of its own and is known as a strong, steady performer.

But there will be more deals like this over the next 18 months because as winning new business gets tougher, acquisitions will be the only real alternative for companies looking to maintain strong growth in the government market.