Monday, September 21, 2009 03:47 PM

If you liked Perot, you should love CGI
Steve Ladurantaye

Dell Inc.’s decision to spend $3.9-billion (U.S.) on Perot Systems has those who follow CGI Group Inc. wondering what it may be worth in what seems to be a bull market for technology consulting firms.

“While we do not believe CGI is a near-term take-out candidate, we cannot help but wonder if CGI would consider selling itself if it could attain the same lofty multiples as Perot,” Desjardins Securities analyst Eric Bernofsky said Monday in a note.

“Given the lofty valuation being paid for Perot, we expect the sector will be strong as the market speculates on other niche competitors that could also become acquisition targets.”

The two companies operate in similar spaces, he points out. Last year, Perot generated 47 per cent of it revenue from health care and 23 per cent from government. CGI’s stake in the same sectors is only 33 per cent, however both companies have combined revenue in those sectors that is “essentially the same size.”

Dell valued Perot at $30 a share, which represents trailing multiples of 30x price earnings, 1.56x revenue and 13x EBITDA. Using the same multiples for CGI would mean a takeout price between $20-$30 (Canadian - the shares were trading for $12.84 Monday afternoon).

Not bad, but that’s not all.

“A case could be made for CGI commanding a higher multiple given its earnings are expected to grow twice as fast next year (12.1 per cent vs. 6.1 per cent based on ThomsonONE consensus estimates for Perot), and its net margins are almost twice as high (8.0 per cent vs. 4.4 per cent),” he said. “In 2008, Perot generated $1.50/share [U.S.] in free cash flow, similar with CGI; however, given Perot’s higher share price, its yield is lower.”