CGI Group, the international corporation whose subsidiary was charged with building HealthCare.gov, is causing a separate stir outside the Beltway, on Wall Street — where major investors are worried about dubious accounting tactics.
“Several smart investors — including well-known short-seller Jim Chanos, who runs Kynikos Associates — are betting against CGI, or shorting its shares, not because of the quality of its work but because of questions about its earnings,” a Vanity Fair report reads.
The investors are worried that the company routinely inflates its earnings, particularly when acquiring existing businesses. The trick is to undervalue the company it is about to acquire, so when it reports its post-acquisition earnings, it appears that by joining the two businesses have earned greater than the initial sum of their parts.
The problem with this tactic is if there is an actual problem with the new business, and its true value declines after the acquisition, that loss is masked by the public under-valuation.
“This seems to be the case with CGI and Logica, [a company CGI recently acquired],” Vanity Fair reports. The combined revenue of CGI and Stanley was $4.7 billion in the 12 months ending in March 2010. In the 12 months ending in June 2012, revenue fell to $4.2 billion. That’s right when CGI bought Logica, thereby effectively doubling its revenue. But the combined CGI/Logica business is now shrinking again.”
Between the business world’s suspicion and the public scrutiny after HealthCare.gov’s disastrous rollout, CGI no longer enjoys the low public profile most federal contractors do.
They might be wishing they didn’t get that contract at all.