The spiralling demand for management consultancies capable of marshalling digital transformations has driven a spike in M&A activity in professional services. According to new data, M&A activity across the industry was robust in 2017, with digital disruption driving demand and premium valuations for firms in a variety of hot spaces
Specialist M&A advisory firm Equiteq works to advise owners of knowledge-intensive services businesses around the world from offices in London, New York, Singapore, and Sydney, helping owners achieve their growth and exit objectives. As such, the firm also produces a series of benchmarks each year detailing and analysing merger and acquisition activity in the professional services industry. The analysis focuses on five major segments for knowledge-intensive services businesses: management consulting, media agencies, IT consulting, engineering consulting and human resources – which the researchers call the ‘knowledge economy’.
According to the latest report, mergers and acquisitions calmed after a strong start to 2017 – and while the figures are still robust, they did not reach the heightened levels of the past few years. Activity in the global knowledge economy has now fallen for two consecutive years, having stood at 2,669 deals in 2015. The total number of transactions declined by 1% to 2,633 one year later, before a marked slowdown of 5% in 2017 to 2,502 overall.
The bulk of deals last year came from the management consulting sector, at 863, followed most closely by technology consulting at 635. This represents the close ties of both segments to digital transformation consulting – which boomed to revenues of $44 billion in 2017 – as clients consult multifaceted management consultancies to plan
What is likely to have given management consultancies the edge, and thus heightened the demand for them in terms of acquisitions, is their versatility, and capacity for providing holistic services to a broader client base. Many buyers from other industries also consider premium consulting services as a tip of
Examples of major management consulting deals closed in 2017 include the acquisition of Aecus by The Hackett Group and that of Nyras by PA Consulting Group – both in the UK. In Asia, Deloitte carved-out a team of around 40 advisors from CBIG Consulting, while in the Middle East, Sia Partners bought ShiftIN Partners, while McKinsey & Company picked-up Saudi-Arabia based Elixir Management Consultancy. In other strategy consultancy deals, EY-Parthenon bought OC&C Strategy Consultants France, after it previously bought both the German and Benelux arms of
Large deals closed in North America included Huron’s acquisitions of Innosight and Pope Woodhead, the integration of C1 Consulting into Charles River Associates, the pickup of Quorum Consulting by Navigant, and the $2.6bn deal to acquire The Advisory Board, which backed by investors split into two practices: a healthcare unit and an education arm.
While the management and
Engineering consulting underwent the most drastic change in M&A activity of any segment. A 37% decline saw deals fall from 304 in 2016 to 192 last year. Partially this may be due to the climbing levels of debt in the industry, coupled with a slow-down in demand relating to a turbulent period for the construction industry and subdued infrastructure spending across many developed economies. These were themes played out by the purchase of Atkins by SNC-Lavalin, which while the deal went ahead, heralded a series of job cuts for the purchased firm due to these pressures – pressures which may have put off suitors looking to make similar deals in 2017.
The size of deals in the segment, and to a lesser extent inflated prices, may also have contributed to this. While engineering consulting saw a dramatic fall in deal volume, the median deal value in the segment remained highest.
M&A by region
M&A activity varied dramatically via region. To an
Europe, which likewise hosts a number of the world’s largest consulting markets including the UK, Germany and France, saw
his decline was also witnessed elsewhere. Albeit to a lesser extent, Australasian deal levels fell 14% to 98 deals, and the collective ‘rest of the world’ saw a decline of 29% to 91. These smaller economies were the only ones to buck the trend of which two consulting segments dominated activity – as while management consulting headlined both regions, media agencies actually proved narrowly more popular than technology consultancies.
The role of private equity
Globally, private equity backing for deals over $10 million currently sits at its highest level since 2013,
In contrast, private equity involvement in deals worth less than $10 million has been hovering around the 2% to 4% range for years. Deals providing private equity investors with recurring revenue streams from repeat client engagements, scalable intellectual property and access to lucrative markets such as the financial services sector is likely to continue in the coming year.
The global economic outlook for 2018 is strong and Equiteq expects the industry trends underpinning M&A activity across the knowledge economy to continue over the next 12 months, as new digital technologies in spaces like automation, blockchain and augmented reality impact on business models across sectors over the long term. The pace of adoption of these technologies is likely to be the key to where investor appetite will be the strongest over the coming era.
David Jorgenson, Equiteq’s CEO, said of the study, “We are seeing knowledge-intensive services providers under enormous pressure from a rapid wave of disruption led by an accelerating trend of technology-enabled innovation. We are also seeing a continued blurring of boundaries across all firms utilising intellectual capital, not just consultancies but also software and managed service companies. Looking ahead, there is an unparalleled opportunity for pioneering business owners and entrepreneurs to create value and make profitable exits within the disruption zone of the knowledge economy.”