Almost a year ago LogicaCMG was approaching another big acquisition with some trepidation.
That summer had seen a wave of protectionist rhetoric from French politicians worried that Pepsi was going to launch a bid for Danone, the flagship food group – not the ideal climate for Logica to go after Unilog, one of France’s leading technology companies.
In the event, the fears of Martin Read and his team were unfounded. The logic of consolidation in the IT services sector was such that his €931m ($1.2bn) bid for Unilog was accepted by the target’s management and met with no stirrings of “economic patriotism” from the country’s government or media.
The logic continues today. Multinational companies are keen to have fewer IT suppliers and want those that remain to be able to serve them cheaply and globally. Established western IT providers such as IBM, Accenture and Logica are also having to cope with the rise of low-cost Indian rivals.
Wanting to play a key role in the consolidation, Logica has set a long-term target to become a top-10 IT services company. Monday’s announced acquisition consolidates it as Europe’s second-largest company in the sector by market value after CapGemini of France.
Investors have not always supported the acquisition policy with unfettered enthusiasm. The company’s shares are below the level they were trading at this time last year and, although prone to intra-day volatility, they have remained stagnant over the past few years, underperforming CapGemini and Atos Origin, the other large European competitors.
Mr Read was phlegmatic on Monday in the face of a 7.5 per cent fall in Logica’s share price. “It was inevitable with a deal like this that you would get a lot of hedge fund activity,” he said. He pointed out that the shares had fallen on news of the Unilog deal before recovering as integration proceeded.
The more sceptical shareholders will now hope that the boundaries of the empire stay fixed for some time. “Investors tend not to forgive companies that overpay,” said Hans Slob, an analyst at Rabo Securities.
But Mr Read is unflinching in his determination to enter the global top 10 of IT services companies, dominated by US heavyweights such as IBM. “We’ve been on a journey,” he said. “When I started with Logica 13 years ago there were 3,000 people. This will take it to 40,000.”
The company’s issues are not all related to scale. In Germany, Logica has only recently started to turn a profit, helped by the integration of Unilog’s profitable business in the country. There is no obvious quick-fix takeover target that would speed up an improvement.
Apart from high-end IT services in areas such as electricity trading and anti-money laundering for central banks, Logica also has a wireless division serving mobile phone operators, which many analysts fear does not make a good fit with the rest of the company and does not generate sufficient profits. Mr Read, though, is in no rush to sell.
Mr Read sees the threat to Logica and the wider industry coming from India, where companies such as Tata Consulting and Infosys are already larger than their Anglo-Dutch rival.
“It’s particularly refreshing to see a company like Logica expand beyond our shores,” said one person close to the deal yesterday. Observers are divided on whether this patriotic view makes sound business sense.