LogicaCMG bids for IT services rival

A takeover bid would catapult LogicaCMG up the IT services league, but the City is taking a dim view
Written by Graeme Wearden, Contributor

LogicaCMG is bidding to acquire Scandinavian rival WM-data in a deal that will make the UK IT services company a major European player.

LogicaCMG announced on Monday morning that it has offered to pay Skr11.9bn (£882m) for WM-data. The deal has the support of WM-data's board of directors, and is thus likely to succeed.

Martin Read, LogicaCMG chief executive, said the deal would help it win large global contracts and establish a stronger base in the Nordic regions.

"Increasingly, our customers want to do business with a smaller number of larger suppliers who can provide them with a broader range of offerings and support them internationally," said Read in a statement.

If concluded, the deal would make LogicaCMG the seventh largest in Europe based on sales, which could exceed £3bn a year. The firm would employ almost 40,000 staff in 41 countries.

However, investors were not impressed with the move, and drove LogicaCMG's share price down by around seven percent. The perception is that LogicaCMG has overbid for its rival.

Read said that LogicaCMG has identified £15m in annual savings following the takeover. Some jobs are likely to be lost, but the bulk of the savings will come through improved efficiency and new sales opportunities rather than by stripping out costs.

"It's worth noting that the logic of the deal — which LogicaCMG says is earnings-enhancing — rests heavily on revenue synergies, not on cost synergies," pointed out Ovum analysts Phil Codling and Douglas Hayward in a research note.

"These can be more elusive than cost synergies, and can take longer to deliver. But if LogicaCMG can lower WM-data's delivery costs (using its global-delivery mechanism) and make its new subsidiary's operations more attractive to Nordic multinational clients by creating a stronger services portfolio and delivering greater pan-European clout, then it stands a chance of raising WM-data's organic revenue growth," Codling and Hayward added.

Other experts were less positive.

"LogicaCMG are paying way too much. The synergies are limited because LogicaCMG is small in the Nordics. I expect the shares to come off even more," analyst Hans Slob of Rabo Securities told Reuters.

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