Logica and CMG are holding preliminary talks about merging their operations to save costs and remain competitive in the tough market for IT services.
"We are holding talks about the commercial merits of a merger," said Logica spokesman Will Cameron on Tuesday. "The talks are at an early stage, and we don't expect to announce details for several weeks."
Like larger competitors EDS and Cap Gemini, Logica and CMG, both based in London, are seeking ways to cut costs without losing a competitive edge.
The deal adds weight to arguments that the European IT services industry is ripe for consolidation.
"This is not an acquisition or a merger aimed at expanding their services portfolio but rather at consolidating their position," said Jamie Snowdon, an analyst at the London office of market researcher IDC.
Should the companies agree to merge, a combined business would not only lead to significant cost savings but also create one of Europe's largest publicly traded IT services companies and a leading provider of mobile messaging software, Logica said in a statement.
Size is an issue. "In uncertain times, enterprises want to work with a firm they see as more secure and more stable," said Ned May, an analyst at IDC. "There is a shift away from some of the smaller players."
A transaction would be structured as an all-share merger, with Logica shareholders owning 60 per cent and CMG shareholders the remaining 40 per cent of the combined entity, Logica said.
Moreover, it is envisaged that CMG's current's executive chairman, Cor Stutterheim, would be the non-executive chairman and Martin Read, present managing director and CEO of Logica, would be CEO of the combined company, according to Logica.
The talks come after both companies have seen their shares slump more than 80 per cent in the past year and the prospects decline that European businesses will resume spending on technology soon.
On Tuesday, IDC lowered its 2002 growth forecast for IT service spending worldwide to 6.7 per cent, down 3.9 points from its earlier forecast of 10.6 per cent for the year.