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Juliette Garside, Thursday 31st May 2012 19:27
Logica is poised to become the third major British IT company to be swallowed by a North American buyer since last summer after its board accepted a £1.7bn offer. The sale to smaller Canadian competitor, CGI, values Britain's largest IT services group at no more than its shares were worth in March. It was criticised as a "terrible return for shareholders".
CGI wants to acquire Logica for 105p a share, a 60% premium to Wednesday's closing price. Logica's chief executive Andy Green, who had presided over a halving of the company's share price since joining in January 2008, stands to receive £5m from the deal in shares, bonus and compensation if he is dismissed.
The decision to sell comes after a grim recession for Logica. With its European public sector clients cutting costs, the company issued three profit warnings in 2011 and cut 1,300 jobs in December.
"This is a failure of execution," said Richard Holway, an IT services analyst who runs Tech Market View, a research firm. "The result – apart from terrible returns for shareholders – is the loss of another part of the UK's fine tech heritage."
The banking software group Misys was sold for £1.3bn in March to the US buyout group Vista Equity Partners, while search specialist Autonomy went to Hewlett Packard for £7bn last summer.
Autonomy's senior team has left since the takeover, with founder Mike Lynch, who had originally vowed to stay on, announcing his departure from the Cambridge company last week.
The UK is the largest single market for IT services in Europe, but if CGI's offer is approved by shareholders, there will be no British-owned company in the top 10 providers of IT services in this country. Some 25 years ago, there were nine British companies in the top 10.
"It's not a lack of management ability, it's a lack of management ambition," said Holway "People find it much too easy to sell out than to grow something big and something international."
The companies argued job cuts would be minimal because Logica's operations are strong in Europe while CGI has a small presence here. However, the takeover may be bad news for graduates. Logica, which is based in Reading and employs 41,000 staff, 5,500 of them in the UK, is a major recruiter. Industry watchers say foreign companies do not employ many British university students.
Since Kraft's controversial takeover of Cadbury, which has led to the loss of 200 British jobs, the acquisition of UK companies by foreign firms has been in the spotlight. Phillip Bond, of the leftwing thinktank ResPublica, said London's status as a financial centre made British companies vulnerable. "We constantly reward the short term over the long term. The rewards will accrue to British banking at the expense of British industry. We've got an international finance industry that has no national interest."
The investment funds Schroder and Artemis, which between them own 18% of the company, have voted to support the CGI takeover. Logica was advised on the takeover by Rothschild, Bank of America Merrill Lynch and Deutsche Bank, while CGI employed Goldman Sachs.
Logica's share price closed higher than the offer price at 111p, on the expectation that a rival bid could materialise. To buy the board out of its commitment to CGI, another company would have to offer a 10% premium to the agreed price. Dell and Capgemini were both cited as companies with the potential to trump CGI's bid.
"There is at least a small chance of a counter bid," said David Toms, a Numis analyst, stressing that the UK's IT sector is "materially undervalued" and that he expected further takeovers, with Micro Focus and accounting software firm Sage both potential targets.
When Green joined Logica in January 2008, its shares were worth 121p, but their value had declined to 66p by Wednesday evening, before CGI's approach was made public. During that time the FTSE 350 software and computer services index has risen more than 60%.
Under the terms of the offer, Green will collect £1.64m in performance shares which had yet to be awarded under various incentive schemes. The shares he already owns will be worth £1.94m, and he will be given a bonus worth 100% of his £750,000 base salary pro-rata to September, when the deal, if approved by shareholders, is likely to close.
If he is made redundant, he will collect a year's salary in lieu of notice and pension payments which together would total £975,000.
Green defended the deal, saying: "This is a good premium. We don't seem any closer to the end of the crisis in Europe and it's quite natural that shareholders would say the prospects for this company are not as good as they were two years ago."
CGI, which has half Logica's turnover but is twice as profitable, will pay cash for Logica and has financed its long term bet on a recovery in Europe by raiding its credit facility, issuing new shares and raising bank loans.