10.18.13 9:45 AM ET
The Company That Built Obamacare Is Doing Better Than Ever
A funny thing happens to the shares of large, largely anonymous federal contractors when they become implicated in a debacle: they rise. We saw this at work earlier this year with Booz Allen Hamilton. The firm, which gets virtually all of its revenue from the federal government, employed Edward Snowden, who proceeded to use the access afforded him by his post to grab and make public all sorts of embarrassing secret government information. But Booz Allen didn’t lose any contracts as a result or suffer much opprobrium in the public markets.
Now something similar is happening with CGI, the giant Canada-based information technology outsourcing company that has been heavily involved in the heavily botched roll out of Healthcare.gov, the federal health insurance exchange that is the centerpiece of Obamacare.
CGI, which very few people had heard of before this month, shows how a company can grow to become large, highly profitable, and very influential without being in the public eye—even when a big chunk of its business is funded by taxpayers. Based in Montreal, CGI was started by founder and executive chairman Serge Godin in 1976 when Godin was 26. Today, it boasts 69,000 employees who work in an impressive array of offices around the world. You can learn about the firm’s history here, and read about its Constitution (!) here.
CGI’s mission involves the usual gobbledygook about providing “end-to-end IT and business process services that facilitate the ongoing evolution of our clients’ businesses.” Translation: it’s an outsourcer. Don’t want to set up your own payroll, h.r. system, records-keeping system, computer system? CGI will gladly do it for you. “At CGI, we are in the business of delivering results,” the company notes.
Inevitably, companies like this do a lot of business with governments. Over the years, it has become easier for governments to hire outside companies who are up on the latest technology to handle such tasks. And, ironically, in this age of austerity, CGI has been doing quite well. As the chart below shows, the stock is up 38 percent in the past year.
CGI grew organically for much of its life. And then, like all firms that want to expand rapidly, it started to gobble up other companies whole. In 2010, CGI purchased Stanley, Inc., which, the company notes, “nearly doubled the size of CGI’s U.S. operations.” In addition, the company continues, “the combination of talent and capabilities created further opportunity for growth in the key U.S. federal market.” (Emphasis mine.) By purchasing an American company, this Canadian firm began federal government contracting in a big way at the right time. Last year, CGI merged with Logica, an Anglo-Dutch company that was larger than CGI. In effect, it more than doubled the company’s size. “With this acquisition, we became the world’s fifth largest independent IT and business process services company.”
As a result of the Stanley acquisition, CGI is a big player in the U.S. government market. “Our client experience in North America includes over 100 U.S. federal agency clients and more than 95 Canadian federal clients,” the company notes. It has done work for the State Department, the Environmental Protection Administration, and the Defense Department. One of its units “manage[s] the financials of 100+ U.S. federal agencies.” In September, CGI’s Stanley unit won a $32.8 million deal to provide visa-processing services to the State Department in several European countries, bringing the total countries in which it provides these services to 57.
In an age of rapid technological change and a continuing need to collect, harness, and sift data, this is a good business to be in. In its most recent quarter, CGi reported revenue of $2.57 billion, up 141.1 percent from the previous year—largely thanks to the Logica acquisition. (Note: all figures are in Canadian dollars.) The vast American market (public and private sector combined) accounts for about 26 percent of the company’s revenues, or $634.7 million in the third quarter. Throughout the world, governments are the largest single sector, accounting for about 30 percent of total revenues. CGI said that in the third quarter, work for the U.S. federal government accounted for 13.5 percent of revenue, or about $334 million. In the U.S., the company notes, the “top two vertical markets were government and health,” which combined accounted for 80 percent of their U.S. revenues.
Which brings us to the Affordable Care Act. Health care reform—the gathering of data, the construction of exchanges, the push for electronic medical records—has been a boon for technology firms large and small. (Last month, Miranda Green profiled a small Virginia-based start-up that is expanding rapidly to help states construct exchanges.)
CGI has been involved from the beginning. In December 2011, the company announced with fanfare that it had won a contract worth up to $93.7 million “ to build the U.S. government’s federally-facilitated health insurance exchange.” In the months since, it has received other Obamacare-related work. In June, health care co-ops—non-profit health insurers conjured into creation to compete in the Obamacare era—in Louisiana and Kentucky hired CGI to handle their business processes.
As the Washington Post reported, other companies have also been involved in the construction of the Obamacare system. Quality Software Services, for example, received $55 million to construct the so-called “data hub,” which funnels information collected by federal agencies to and from the state and federal health care exchanges. But CGI’s involvement is the largest and most prominent. It is the central contractor for the federal exchange. And it is the federal exchange, Healthcare.gov, that has struggled most visibly in the first two weeks of the rollout.
And yet, while CGI’s name has appeared in an unflattering light, the negative attention doesn’t seem to have affected its stock. In fact, in the past several weeks, CGI’s stock has actually been rallying, and its market capitalization is above $11 billion.
It could be that, as the adage goes, there’s no such thing as bad publicity. Or it could be that curious investors are taking a look at CGI’s financials and like what they see: a rapidly growing company with healthy margins and a mix of deep-pocketed government and private sector clients around the world. Sure, CGI, which didn’t return a call seeking comment, has stubbed its toe. But the beauty of being a very large contractor for the U.S. government is that once you’re in the club, it’s very hard to get kicked out. Botching the rollout of Healthcare.gov won’t stop CGI from getting new contracts any more than it has stopped Booz Allen Hamilton from getting new contracts after it botched the Snowden affair.