The information technology consulting firm American Management Systems Inc. will probably emphasize outsourcing more once its sale to rival CGI Group Inc. is completed.
AMS, of Fairfax, Va., has developed a range of cash management and trade finance software for the banking market. It sees the recurring revenue stream from providing outsourcing services as “an opportunity waiting to happen,” said chief executive Alfred T. Mockett.
The $858 million deal with CGI, which is based in Montreal, was announced after the stock market closed Wednesday. It is expected to close in May, and Mr. Mockett said he would step down as CEO and chairman of the board after a transition period.
He said the combined company would have revenue of $4 billion and a contract backlog of $10 billion, which would make it one of the world’s 10 largest IT consultants. CGI has made 55 acquisitions since its founding in 1976.
“In our business, scale matters,” Mr. Mockett said Wednesday on a conference call to discuss the deal. “We hear it from customers every day. They will only entrust large-scale, mission-critical systems development to large-scale suppliers who can demonstrate that they have the depth of resources to stay the course.”
Serge Godin, CGI’s chairman and chief executive, said the acquired company would add 15% to 20% to earnings and that it would take about two quarters to work through post-merger issues.
“We have a proven approach to integrations,” Mr. Godin said on the call. AMS, which was founded in 1970, counts among its U.S. clients financial companies including Bank of America Corp., Bank One Corp., Comerica Inc., Huntington Bancshares Inc., J.P. Morgan Chase & Co., and KeyCorp.
Michael Roach, CGI’s president and chief operating officer, said the combined company would do business in the United States as CGI-AMS and would probably be able to compete for larger outsourcing contracts in North America and Europe.
Mr. Roach said CGI hopes to use the Virginia company’s managed-service business to convert systems integration customers to outsourcing. This would create ongoing sources of revenue instead of one-time project fees.
Said Mr. Mockett, “Expanding the business model from design, build, and install to design, build, and operate is a natural opportunity, an extension of the business model.”
The transaction structured as a tender offer by CGI for AMS’ shares. CGI is offering $19.40 cash for each of AMS’ 42.6 million outstanding shares. That would be a 25.4% premium over the closing price Tuesday.
AMS shares rose sharply after the announcement and closed Friday at $19.17, up 21% for the week.
AMS also agreed in the deal to sell its defense and intelligence business to its longtime partner CACI Corp. of Arlington, Va., an IT consultant specializing in the government market. That deal, priced at $415 million, will reduce CGI’s net outlay to $443 million and is to close concurrently with the main deal. CACI would have a strategic alliance with CGI similar to its current partnership with AMS.
One reason a two-part deal was worked out was so that CGI would avoid problems with clients of American Management’s defense and intelligence unit. “The business risk for CACI is less than it would be for CGI, being a foreign-based company,” Mr. Roach said.
