Desire for broader base drove CGI-Stanley deal

One set of statistics explains why CGI Group is spending $1 billion to acquire Stanley Inc.

Pre-acquisition, CGI had barely any defense and intelligence business. For Stanley, 77 percent of its $865 million in 2009 revenue came from defense and intelligence customers.

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Once combined, the split will be 47 percent civilian and 53 percent defense and intelligence on $1.2 billion in U.S. government revenue.

“We can now be a power player offering full end-to-end IT and business process services to all corners, all reaches of the federal government space,” said Donna Morea, president of U.S., Europe and Asia operations for CGI. “We will be in all three branches of government, 12 of 15 Cabinet-level departments, every military service and all of the intelligence agencies as well.”

That breadth of customer base was a “strategic imperative” for CGI, she said.

For CGI to continue growing, it needs access to new government markets, and it needs new capabilities to sell into its existing customer base. It gets both with the acquisition of Stanley, Morea said.

The company has been looking for potential acquisition targets for some time and got to know Stanley better as the two companies pursued contract opportunities together, said George Schindler, president of CGI Federal. 

Although the two companies didn’t win any contracts together, they learned enough about each to recognize that they had complementary values and cultures, Morea said.

“Both sides value high client satisfaction and have long-term, deep customer relationships,” she said.

CGI will be able to bring Stanley’s service offerings to CGI customers, and Stanley will be able to bring CGI offerings to its customer base, Morea said.

“We are excited about cross-fertilizing those capabilities and bringing more capabilities to our clients so we can have higher value relationships with them,” she said.

For example, Stanley has strengths in cybersecurity, identity management and biometrics, which Morea said can be brought to CGI’s civilian, state and local, and commercial customers such as financial institutions.

“Domain expertise and deep client relationships is really the competitive differentiator for Stanley and it is the same competitive differentiator for us,” Schindler said.

For example, health care is one segment of the market where the combined government businesses will have broader opportunities than CGI or Stanley could tackle on its own, Schindler said.

“We’ve had success on the civilian side, Stanley has a lot of deep client relationships and I think together we can attack the military health and veterans health areas,” he said.

CGI had difficulty getting to that market because it didn’t have the customer relationships, and Stanley couldn’t win that business because it lacked the health IT capabilities, Schindler said.

The ability to offer broader career and professional development opportunities is one of the key messages executives have been delivering to CGI and Stanley employees, he said.

Stanley has been growing steadily as an independent company but as it approached $1 billion in annual revenue, executives knew sustaining its growth would get harder and harder, said George Wilson, executive vice president for Stanley.

“And providing the opportunities for growth to individuals within Stanley would get even more difficult,” he said.

Still, the reaction to the news among Stanley employees started with shock , then sadness and finally excitement, Wilson said.

“Shock, because we had kept everything quiet; sadness because of the long-term Stanley legacy we are all proud; and finally, excitement at the opportunities ahead,” he said.

Stanley isn’t just becoming part of a $1.2 billion federal business, it will be part of a $4.5 billion company with reach into state and local, commercial and international markets, he said. “We have reach back into all of that so this really bulks us up.”

In an analyst call April 28, CGI President and CEO Michael Roach said he was looking for an acquisition that could transform the Montreal-based company as did the acquisition of American Management Systems in 2004, which was CGI’s entrance into the U.S. market.

With that deal, though, CGI decided to acquire only AMS’ civilian business, with the defense and intelligence business going to CACI International.

CGI is a different company today, Morea said.

“We didn’t have the capability to perform classified work and no expertise at integrating a defense and intelligence business,” she said. “There also were financial considerations.”

But in 2005, CGI signed a special security agreement with the U.S. government which allows it to do classified work. It also now has a facility with top-secret clearance, she said.

“We are very excited to be back in the defense and intelligence market,” Morea said.

Acquisitions will continue to be part of CGI’s strategy. The company overall has a goal of having a 50-50 split between organic growth and growth through acquisitions, she said.

Companies in the federal market are consolidating through mergers and acquisitions, and CGI will be one of the consolidators. “We want to be a buyer,” she said. “We want to say we read the menu, we aren’t on the menu.”

Making acquisitions will be an increasingly important strategy for any government contractor that wants to continue to grow, said Ray Bjorklund, chief knowledge officer and senior vice president of market research firm FedSources Inc.

“The market is shrinking, so it is getting tougher, and acquisitions are an important way to stay competitive,” he said.

Buying Stanley is a big step forward in the federal market for CGI, so “it makes a lot of sense,” Bjorklund said.

The economic climate makes the federal market a good place to invest, Morea said. “It is a massive, massive market and even if growth slows, it is a stable, strong market that provides great growth opportunities for us.”