Brexit driving demand for consultancy services – and M&A

15 July 2019 5 min. read

UK’s exit from the European Union has been driving demand for services from UK consultancy firms. In its slipstream, Brexit is also leading to heightened interest in mergers & acquisitions. David Jorgenson, CEO of Equiteq, reflects on the trend.

Last month the National Audit Office released figures showing government spend of £97 million on external Brexit-related consultancy fees over the previous twelve months. Bad news for government – that’s an overspend of £32m on budget for the period – good news, though, for the consultancies involved and for government, in terms of capacity. In circumstances as uncertain as they were unprecedented, large volumes of scarce and highly-skilled resources were deployable. 

Though direct beneficiaries of this spend were mainly restricted to a limited elite of ‘usual suspect’ suppliers (six consultancies accounted for >90% of the £97 million), demand has also swelled for consultancies serving the private sector around related issues. Compliance, regulatory and supply chain consultancies are some of the providers in highest demand as firms attempt to plan and adapt for a transition of persistently unclear timing and nature.

M&A in consulting

Brexit is a key factor underlying the recent robustness in M&A among consultancies. Besides driving revenues, a widening supply-demand gap for knowledge-intensive services – that Brexit is exacerbating – is attracting interest from strategic and financial acquirers leading to record levels of M&A activity in the sector. Regulatory, compliance and supply chain consultancies, for example, represented about 20% of UK-based professional services acquisitions in the last 12 and 24 months, up on 16% in 2016.

Number of acquisitions of UK professional services firms

To some extent this uptick gives a trailing indicator of recent commercial success (and, for listed companies, stock market performance). This has made available the necessary capital to support inorganic growth. Notably, those six firms most highly favoured in last year’s government Brexit spend also made at least 20 acquisitions over the period (a figure that is likely understated given the many smaller, unannounced deals by Deloitte and PwC that appear only later in their global annual accounts). 

This is part of a broader, ripple effect going on across the professional services landscape – companies with IP-rich technology and services businesses – as the activity of these serial acquirers drives widespread convergence and consolidation. IT services firms, performance improvement consultancies, marketing and media groups, engineering consultancies, strategy consultancies: all are acquiring new and overlapping capabilities. As businesses move expand their propositions to compete with one another or satisfy escalating client demands, inorganic growth is the route of choice for many. 

Given the pace of change and innovation and the ongoing shortage of specialist talent, M&A can be the only route that is viable – not least when the same increased competition, coupled with macro factors, hits organic growth rates and activist shareholders are baying for outsized returns. 

Innovation, globalisation, regulatory scrutiny and protectionism, shifting demographics, environmental concerns: the pace and scale of change in the business environment and the resulting complexity is prompting a wave of consolidation that organic growth and recruitment simply cannot keep up with. A recent report by McKinsey & Company found that top-performing ‘superstar’ firms tend to be more focused on intangibles in their investment strategy; alongside R&D this includes strategic M&A to pick up the projects of other firms. Individual projects then, besides capabilities, are making for attractive corporate targets: and what does Brexit imply, to consultancies, if not on some level a vast, multi-dimensional, ever proliferating project? 

Another Brexit-related factor driving the trend is the decline in Sterling. With assets growing cheaper for European and US buyers, more than 7,000 transactions have been completed in UK’s professional services landscape in the period, with depreciation of the pound likely offsetting some of the impact of political uncertainty. Against an overall decline in UK deal flow in the last 24 months, cross-border M&A activity into the UK continued to rise proportionally, representing 30% of all consultancy deals in 2018 versus 26% in 2017 and 2018.

Finally, to the extent that Brexit can be held responsible for undermining the stability of the current UK government, there is widespread concern among entrepreneurs that changes to Entrepreneur’s Relief and Capital Gains Tax rates could soon be on the agenda. As the wary look to ‘cash in while they can’, it is Brexit that is propelling former ‘lifestyle’ consultancies into the M&A market – a journey that leads them as often as not to turn to other consultancies for advice on transactions.