When London-based services vendor Logica announced the acquisition of rival CMG at the beginning of November 2002, it was hardly an unexpected move. The deal had been trailed a month earlier in the business sections of many UK Sunday newspapers. Nevertheless, reactions to the deal were mixed.

Logica’s CEO Martin Read, for one, was ebullient. “Bringing Logica and CMG together will create a powerhouse in IT services and wireless telecoms,” he said.

But industry analysts were more circumspect. On the one hand, the transaction will make the company, which will be named LogicaCMG, the second largest publically listed IT services company in Europe, just ahead of its acquisitive Franco-Dutch competitor Atos Origin.

Yet on the other, some argue that the level of overlap between the Logica’s and CMG’s activities are too great and, worse still, will leave the merged company deficient in several

key areas. In particular, they claim, Logica CMG will be over-reliant on the stalled mobile telecoms sector.

“Both companies have duplicate skill sets in the systems integration and IT implementation sectors where there has been a shrinkage in demand, especially among telecoms and financial services companies,” says Andrew Parker, a senior analyst at Forrester Research.

Yet the current downturn in IT spending will drive such a high level of consolidation in the computer industry that within the next two years, about half the IT brand names that CIOs are familiar with today will have disappeared, says Gartner Group CEO Michael Fleischer.

Viewed in that context, the merger makes a lot of sense, says Judith Jordan, an analyst at service specialist Ovum Holway. “In the mid-market, which is really where they are, you have either got to get big or go niche,” says Jordan.

The choice facing Read and Logica was therefore either to acquire or be acquired, and a business personality as notoriously combative as Read was unlikely to consent to the latter if he could help it.

Despite the clear overlap in wireless systems implementation, there are more areas where the two companies’ activities are complementary. For example, CMG is strong in the UK public sector and the Benelux region of Europe, while Logica is strong in vertical sectors such as utilities and enjoys better coverage in the US and Asia/Pacific regions.

The most glaring omission, says Jordan, is LogicaCMG’s continued lack of presence in the business process outsourcing (BPO) market, which involves taking over and running entire corporate departments. “We would have liked to have seen something on the BPO front because that’s where we see a big area of growth,” she says.

However, Read has indicated that either a big move into that area or, more likely, a major acquisition of a BPO vendor is under consideration.

But should Logica and CMG clients view the deal with any trepidation? As things stand, Jordan does not see it making a great deal of difference to them.

Both Logica and CMG have been well managed by their respective CEOs, and the division of labour between the two men in the new company is well defined – there should not be any damaging personality clashes, she predicts.

Furthermore, areas for cost savings have already been identified – including staff cuts around the world of about 6% or 1,440 people – and a time frame for their implementation agreed upon. These moves will save LogicaCMG about £60 million annually from 2004, by which time the landscape of the IT services market will look very different.