Computer services groups Logica and CMG have revealed they are in talks about a possible merger after a difficult year for both groups.

Combining the two companies, which specialise in instant messaging services for mobile technology, would form one of Europe's largest IT service businesses.

The groups said a deal would create substantial cost savings, although this has led to concern over job losses as the companies between them employ more than 23,000 people.

UK-based Logica and Anglo-Dutch CMG said it was too early to predict what the deal would mean for staff, but said Logica shareholders would own 60% of the new company and CMG shareholders the remaining 40%.

Perfect match?

The merger is still subject to due diligence - a check on the accounts of both companies.

We believe the deal is more of a shotgun marriage for Logica than it is for CMG

Tijs Hollestelle, Bank Oyens & van Eeghen

The proposed deal follows a tough year for both groups. Once FTSE blue chips they have suffered in the wake of the tech bubble bursting.

Both companies provide the platforms and software for short messages on mobile phones.

However, while this propelled their success in the 1990s, neither group has won significant contracts for next-generation, multi-media services.

Last month, Logica reported a 25% slump in profits and predicted tougher times ahead.

This followed an update from Anglo-Dutch group CMG, which had described the previous six months as "some of the most difficult trading conditions" in the 38 years it had been operating.

Welcome solution

News of the possible deal was welcomed by investors.

Shares in CMG jumped 40% or 16p to 56p on the news, while Logica shares were up 2.75p to 127.75p.

Analysts suggested the deal, which would put the combined group in the league of European leaders Cap Gemini Ernst & Young and Atos Origin, was better for CMG.

Tijs Hollestelle, analyst at Dutch Bank Oyens & van Eeghen, said: "We believe the deal is more of a shotgun marriage for Logica than it is for CMG."

Earlier reports had suggested a merger between the two companies was not possible because of the clash in management styles.

Under the current proposal, Logica chief executive Martin Reed is expected to become chief executive of the combined group, while Cor Stutterheim, executive chairman of CMG, will become non-executive chairman.