Good start to 2017 for M&A in the consulting industry

14 August 2017 Consultancy.uk

According to the analysis of figures from the first and second quarters of 2017, strong merger and acquisition activity in the consulting industry has continued on from 2016. While deals seemed to slow in Q2 meanwhile, favourable exchange rates in the UK particularly could see a continued drive in activity throughout the second half of 2017.

In a series of reports on the state of play of acquisitions within the consulting market, Equiteq, an M&A firm specialised in consultancy, found that buyers quests for new streams of revenue had continued to incentivise firms to invest in deals– particularly as diversification is seen as a key tactic to avoiding being stung by further political and economic uncertainty in the future. Having suffered badly from the global financial crisis of 2008, which saw a dip in activity of 25% by 2009, the market has steadily been rebuilding moment since. M&A growth in consulting finally surpassed 2008 levels in 2015, having been boosted by 21% over the previous two years.

Notwithstanding the momentary market turbulence surrounding the political backdrop of 2016’s Brexit and US Presidential votes, which sent many investors into a brief state of shock, M&A activity throughout last year remained robust, with 2,902 deals being tabled in total over the course of the 12 month period. Management and technological consulting were the largest targets of the industry, with the two sectors being the only two to have seen positive growth in M&A. Amongst a booming technological industry creating new, money-saving innovations and a managerial market keen to adopt cost-saving automation without becoming victims of digital disruption, the two segments saw such a significant boost in popularity that they pushed M&A activity for consulting as a whole up by 1% from the previous record year. With the two themes thought likely to continue into the following term, Equiteq forecast another bumper year of M&A action for 2017.

M&A in the global consulting industry

Following up on their predictions, Equiteq’s quarterly market updates have continued to provide an indicative guide to current M&A market conditions in the consulting industry, and broadly the firms latest updates have shown that the year has indeed started well in terms of M&A within the consulting world. The firm noted strong M&A levels in the first half of 2017. H1 featured a total of 1,306 deals, which while if it were replicated exactly in the second half would lead to a total of 2,612, the lowest since 2013, this would still roughly be on par with pre-crisis levels.

Of the deals featured so far, the bulk took place in North America and Europe, the two highest profile regions affected by the volatile political environment of 2016. While to an extent Europe has since been seen to have stabilised after a series of potential electoral shocks saw moderates retain power across the EU, the UK’s haphazard Brexit strategy means Europe still faces major uncertainty in the future. This has led increasingly to professional services firms looking to boost their presences on the continent in order to prepare for a hostile post-Brexit environment, which continued into Q3 with the notable example of Savills' acquisition of Spanish firm Aguirre Newman.

Carrying on from a strong 2016, the first quarter of 2017 saw 695 deals completed, as executives continued to look to inorganic means to expand their company’s profile and diversify their portfolio. While there was a cooling in Q2 that counter-balanced this, the 611 deals of that term still saw a total first half performance that, in the broader scheme of annual market trends, was far from disastrous.

M&A in the global consulting industry – H1 2017

Researchers were also keen to point out that readers should note large variations between quarterly M&A volumes are typical, and not always reflective of longer term trends, meaning the remainder of 2017 could see a return to bullish M&A activity. A mixed second quarter will still have concerned some market analysts, after a strong start to the year however. Overall global deal activity in the consulting sector fell by 12% quarter-on-quarter, while deal volumes fell by just 2% on the first half of last year. The Equiteq Consulting Share Price Index rallied in the second quarter, achieving similar returns to the S&P 500.

Mixed H1

Equiteq expect robust deal flow in the second half of the year to be underpinned by the strong balance sheets of prolific strategic and financial buyers, the continued access to cheap debt, and the growth of highly acquisitive listed consulting buyers. Researchers also expect this trend to be particularly potent in Europe, one of the strongest performing regions in H1, with deal volumes growing by 5% year-on-year. Although political and economic uncertainties remain from the UK’s Brexit negotiations, M&A activity in the UK grew more than other developed European markets – in no small way thanks to a weakened pound, which has left the UK market particularly open to predatory cross-border M&A from North American buyers, who are benefiting from favourable exchange rates. Technology consulting subsequently saw a 12% year on year increase in deals, and a 5% quarter on quarter improvement too – becoming the only consulting segment to experience growth on both levels.

In-keeping with the digital arms-race most sectors are currently facing, deal activity remained robust in IT Services, as well as the Media sector. This particular segment has seen a diversity of deals among both large and mid-market players, with Accenture’s headline grabbing $1.8 billion acquisition plan seeing them involved in a huge number of deals aimed at strengthening their IT and technology capacity. With the stakes significantly raised by schemes like this, top professional services players like Deloitte and McKinsey have followed suit in acquiring firms to raise their technological capabilities and profiles.

Media consulting services meanwhile experienced the lowest drop of all the negative Q on Q results, -4%, while recording a 2% increase in terms of year on year deal activity. Consulting firms have increasingly looked to the design and marketing sector for expanding their portfolio, with many consulting firms aiming to out-compete traditional ad firms with their analytics prowess, to carve up a significant slice of a lucrative market. This is exemplified by the swoop completed by management consulting firm PointB for the US-based design outfit TNG, with the aim of buying into a new market in order to benefit from long-term gains and diversification that can shield the firm from future economic turbulence, should a future recession cause another knock to management consulting, as per 2008.

M&A in the global consulting industry – Q2 2017

By far the largest source of deals were those brokered in the Human Resources segment however, which thanks to a colossal Q1 yield, in spite of a -14% drop in Q2, still levelled out as a boom of 45% year-on-year growth in M&A volumes. New Mountain Capital’s acquisition of OneDigital Health and Benefits is one of the largest deals in the Human Resources space this year, following Blackstone’s acquisition of Aon Hewitt’s technology-enabled benefits and cloud-based Human Resources platform earlier this year, before Aon reinvested in UK employee benefits business Portus Consulting. Although deal flow in the Management consulting and Engineering sectors still declined this year, having both seemingly peaked last year, there were a number of notable deals in these segments.

Equiteq meanwhile conclude that as share prices continue to reach new highs, the current market conditions continue to remain favourable for sellers of sale ready consulting businesses. The Equiteq Consulting Share Price Index rallied in the second quarter, achieving similar returns to the S&P 500, outperforming the FTSE 100, and reaching a new all-time high, while the Engineering, Human Resources and IT Services sub-indices were the strongest performers – suggesting Engineering activity may also pick up.

According to Equiteq CEO David Jorgenson, news of new deals could be forthcoming sooner rather than later, after publishing their latest quarterly analysis. “As we go to press, DXC Technology have announced a major acquisition in the Microsoft Dynamics space. Bloomberg also reported a potential sale of The Advisory Board’s health division to UnitedHealth and education division to Vista Equity Partners,” Jorgenson wrote in a note accompanying his firm's findings.

For an overview of all consultancy deals featured on Consultancy.uk, see the section 'News | Consulting M&A'.

News