Bursting the bubble for federal contractors

A $1 billion cash deal whereby CGI Group of Montreal will acquire systems integrator Stanley, of Arlington, Va., signaled a major expansion of CGI’s federal business into the defense and intelligence space.

But the acquisition, announced May 7, might also be a harbinger of tough times ahead for federal contractors in general, wrote Nick Wakeman in his "Business Beat" blog for Washington Technology.

“The boom years of the past decade are over for government contractors,” Wakeman wrote. “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.”

The deal gets CGI into the U.S. defense market on a large scale for the first time. CGI is acquiring a company that had about $865 million in revenue in 2009, 77 percent of which was from defense, intelligence and cybersecurity customers. Stanley will become part of CGI Federal, more than doubling the size of CGI’s U.S. government business.

There will be more deals such as this during the next 18 months, Wakeman said, because as it gets tougher to win new business, acquisitions will be the only alternative for companies looking to maintain strong growth in the government market.

He cites the analysis of Ray Bjorklund at FedSources, who said government contracting will shrink during the next several years. Federal information technology spending — the market for CGI and Stanley — is still growing but only by a couple of percentage points.

“The result is that the competition in the government market is going to get tougher,” Wakeman wrote.