Management consulting drives M&A activity in professional services industry

04 June 2018 12 min. read

The spiraling demand for management consultancies capable of marshaling 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.

Number of mergers & acquisitions in the global knowledge economy

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 end to end integrations of new innovative technologies with operational models, while technology consultancies can provide specialist insight on the rapidly changing digital environment. These segments are also converging rapidly with adjacent knowledge-intensive services segments such as media. At this intersection, clients are looking for a more diversified set of customer-focused business advisory skills that comprise a strong knowledge of the latest technologies.

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 spear to on-sell a broad range of adjacent services and hence deliver them with exceptional synergies from a successful acquisition. As such, the demand for deals involving management consultancies climbed 5% on 2016’s total of 820; while technology consulting saw a 9% fall from 695 deals in the previous term.

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 OC&C, and Boston Consulting Group acquired MAYA, marking BCG’s push into the digital marketing arena.

M&A in the knowledge economy by segment

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 technological consulting segments were the largest segments of the industry, being the only two sectors to have seen positive growth in the first half of the year, media agencies also saw stable levels of demand before the year’s end. Media agencies saw a total of 551 acquisitions – an increase of 1% on the 546 of the year before – in part because the largest consulting firms in the world were continuing their determined drive to expand their market share in the advertising and design sphere via inorganic means.

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.

M&A in the knowledge economy by region

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. Median deal value in the segment stood at $20.8 million last year, compared to $19 million in management consulting, and $13.9 million in technology consulting. However, average profit multiples, measured by enterprise value to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), was for engineering consultancy in fact lower than for management consulting firms, and roughly on par with that of technology consultancies.

M&A by region

M&A activity varied dramatically via region. To an extent this is to be expected, as North America plays host to the largest and most mature consulting market in the world, so its 1,193 deal haul leaving other regions in the distance comes as little surprise. This sees a 5% rise on 2016’s deal tally, which sat at 1,140, and represents both the bullish attitude of the American economy at present, and the climate of uncertainty surrounding cross border trade in the near future, as clients are keen to engage consultancies to fortify their futures. As such, management consultancies, leading the way once more, were the most attractive targets for buyers.

Europe, which likewise hosts a number of the world’s largest consulting markets including the UK, Germany and France, saw a 8% fall in deals to 933 – and despite the uncertainty surrounding Brexit, the question of cross-border trade does not seem to have driven much in the way of interest, in spite of this, there is still a substantial gap between Europe’s deal levels and the rest of the global industry.

Asia Pacific saw a mere 187 deals, despite the booming private equity scene in the region; something which fuelled the activity in the previously mentioned markets. In fact, a rather lackluster year for M&A in the region saw a drop of 24% in deals in the Asia Pacific’s knowledge economy, down from 246 in 2016.

Deals in the knowledge economy by segment

This 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.

Asia Pacific did lead the way in terms of cross-border deals however. Cross-border M&A accounted for 22% of all deals in 2017, with APAC purchases beating that average at 29%. While the knowledge economy in the region is less advanced than in Europe and North America, globalisation, economic development and rising adoption of new technologies have driven international demand for specialist businesses in the region – pushing them across borders if these are not available domestically. At the same time many cash rich buyers, notably from Japan, Australia, but also China and India, are using M&A as a tool to expand internationally, reducing dependence on local markets.

The role of private equity

Globally, private equity backing for deals over $10 million currently sits at its highest level since 2013, having ramped up by over 50% over the past two years, to over 12%, suggesting it is becoming an increasingly important driving force for the largest deals across the knowledge economy. The $477 million management buy-out by Capco from FIS, backed by private equity company Calyton & Dubilier & Rice, is 2017’s most notable example. Others include Blackstone’s acquisition of Aon’s HR outsourcing business and Permira’s acquisition of Duff & Phelps. Big management consultancies which are (partly) owned by private equity include AlixPartners, PA Consulting Group and most recently Business Integration Partners.

Private equity backed deals in the knowledge economy

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.

Deal outlook

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.”

Related: Management consulting M&A leads the way as cross sector demand stabilises.