Canadian firm to become bigger player in U.S. federal IT market

Canadian firm CGI Group on Friday expanded its reach into the U.S. federal contracting sector by agreeing to acquire rival information technology provider Stanley Inc. for $904 million in cash. Including debt, CGI said the deal was worth $1.1 billion.

CGI would purchase outstanding shares of Stanley stock for $37.50, a premium from the company's closing price on the New York Stock Exchange on Thursday of $29. Once the purchase is complete, the combined companies will have revenue of $4.5 billion and 31,000 employees, CGI said in a statement.

Stanley is a large provider of technology to the Defense Department and intelligence agencies. The Arlington, Va., firm had $650 million in federal contracts in fiscal 2009, primarily through the Army and Navy, according to figures on the USASpending.gov database.

Montreal-based CGI Group has been a somewhat smaller player in U.S. federal sector. It brought in $178 million in U.S. government contracts in fiscal 2009, generally through civilian agencies, the database shows.

The acquisition will bring additional scale and resources to CGI's U.S. operations, which now will account for nearly half the firm's global revenue, the company said.

"The acquisition of Stanley is in line with our build-and-buy profitable growth strategy, and is consistent with our commitment to continue expanding our footprint in the strategic U.S. market and specifically in the U.S. federal market," said Michael E. Roach, president and chief executive officer of CGI.

Stanley will become part of CGI Federal Inc., a subsidiary that provides contracting services for federal agencies. CGI noted that once the transaction is complete, its client base will be more balanced -- 55 percent of its federal contracting revenue will come from defense and intelligence agencies and 45 percent from civilian work.

The companies said on Friday their respective boards of directors had signed off on the sale.

"This is a great transaction for all stakeholders, as it provides Stanley employees with additional growth opportunities as part of a global IT services player and our clients with a powerful combination of highly-skilled employees and additional scale to enhance value," said Philip O. Nolan, chairman, president and chief executive officer of Stanley.

Ray Bjorklund, senior vice president and chief knowledge officer for FedSources, a McLean, Va., market research firm, said the transaction would make CGI a significantly larger player in the federal marketplace, but not yet in category of industry giants such as Lockheed Martin Corp., SAIC Inc. and Booz Allen Hamilton.

"Does this change the IT sector?" Bjorklund said. "Not really, considering the biggest players out there."

The transaction, which must be approved by federal regulators, is expected to be finalized by the fall.

Bjorklund expects similar consolidation among mid-tier contractors -- companies with billions in revenue but not tens of billions -- as the federal market begins to contract due to insourcing, a proposed discretionary spending freeze and the decline in Recovery Act contracts.