Canada's CGI Buys Stanley for $1 Billion, Expanding Its U.S. Reach

CGI buys Stanley for $1 billionCGI Group (GIB), the biggest information-technology outsourcing operator in Canada, agreed to purchase Stanley (SXE) for $1.07 billion. Stanley is a rival info- tech provider to U.S. defense, intelligence and civilian agencies.

The deal comes to $37.50 per share, which represents a 38.3% premium over the 60-day average. The transaction is expected to close in the fall of this year, but will need to undergo extensive national security review.

Stanley's Laser Focus

Increasingly, the new weapons in the war against terrorism are sophisticated IT systems. As a result, the federal government is likely to continue to spend in this area. One of the beneficiaries of this spending is Stanley. Over the years, the company has won key government contracts for services in cyber-security, biometrics and intelligence support.

The upshot has been a strong growth story, with revenues increasing by an average of 32% per year for the past decade. At the same time, the company has benefited from economies of scale as EBITDA has gone from $35.1 million in 2007 to $76.9 million last year.

Headquartered in Arlington, Va., Stanley has roughly 5,000 employees and 66% of them have national security clearance, which is certainly a strong competitive advantage. The company has made Fortune magazine's "Top 100 Companies to Work For" list from 2007 to 2009.

Building a Strong U.S. Footprint


Through its acquisition of American Management Systems in 2004, CGI got into the U.S. federal IT market, which reached $350 million in revenues in 2009. But there has been little penetration of the lucrative defense and intelligence markets.

This will change with the Stanley deal. In 2009, the company's defense and intelligence segment accounted for roughly three-quarters of its $865 million in revenues.

In other words, the new CGI will be positioned for a nice long-term growth ramp. And, with its strong cash flow generation -- which came to $654.5 million over the past year -- there will be more resources to strike other acquisitions. In fact, on the conference call, CGI's CEO Michael Roach indicated that the next target may be in Europe.

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