How buyers in professional services will approach M&A in 2021

Global M&A advisory firm Equiteq has released the 2021 edition of its annual ‘Global Buyers Report’, outlining key M&A trends among buyers and investors from across the professional services industry. Leaders at Equiteq reflect on the report’s key findings.

With business leaders rapidly adjusting their plans to meet the challenges posed by Covid-19 and private equity firms flush with funds, we have seen a revitalisation in M&A activity unmatched in almost 30 years. But the market remains polarised – buoyant in some sectors, scarce in others. Those firms who can prove their resilience will continue to attract buyers, while those in sectors where there has been a material drop off in earnings will likely see very little deal activity.

The appetite returns

It’s clear that while Covid-19 pulled the handbrake on activity, the appetite for M&A and inorganic growth has remained intact across all segments. As the digital transformation of businesses continues apace, firms know that if they take too long to develop the necessary capabilities to stay competitive, they’ll lose the race. For most, making acquisitions remains the most efficient way to scale.

As such, nearly a third of respondents expect capital for M&A to increase in the next year, with 90% of buyers expecting more or the same capital to be available. This represents a slight increase on last year for strategic acquirers, who expect the purse strings to loosen. It’s also a slight fall for private equity buyers, who appear keen to deploy the funds they already have, rather than seek more capital. 

While good opportunities may be somewhat limited right now, respondents fully expect their volume of deals to increase in the mid-term. Yet, the two-thirds (65%) of private equity buyers expecting to do more or the same volume of deals in the next year is a sizable decrease on the 88% from last year. 

This may be due in part to curtailed expectations as a result of the pandemic. It may also be driven by an expectation of greater competition among funds as resurgent demand outstrips supply.

Looking forward, more than 63% of buyers expect activity to increase in the next 2-3 years, while 5% expect to see a decline. This is unsurprising. As businesses shake off the economic disruption of 2020, the real litmus test of whether a business is investable will emerge in its ongoing resilience over the coming months and years.

“It’s one thing to explain away a shock as people reoriented their businesses,” notes Paul Dondos, Managing Director, Global Buy-Side & Market Intelligence at Equiteq. “But outside of those verticals that are directly suffering, the advisory and technology services around them should not be diminishing because of that initial shock. In fact, the more disruption there is, the more demand for those services you might expect to see.” 

Respondents appear less certain that growth in deal sizes will accompany the return of activity. Strategic buyers seem more optimistic than private equity, with around 43% of strategics expecting deal sizes to increase compared to 25% of private equity buyers. Only around 12% of respondents expect deal sizes to fall. 

Buyers expect the average deal size to sit around $60-70 million in 2021 as the scarcity premiums of Q3 diminish. This will be underpinned by a persisting appetite to park money in safer, lower risk investments, according to Greg Fincke, Managing Director in North America at Equiteq. “We’ve seen buyers spreading their acquisitive risk,” he says. “They’re content to make a series of $50-100 million acquisitions rather than betting on one or two massive deals.” 

Yet with good, resilient opportunities in limited supply, buyers will continue to fight hard to win these deals, so we’re unlikely to see pricings drop off any time soon. This is especially true for in-demand services practices. Cloud, in particular, continues to trade at revenue multiples at or above pre-Covid levels.

Convergence in professional services

The acceleration of digitalisation in the wake of Covid has sharpened the convergence within professional services, with many buyers now hungry to acquire adjacent capabilities. Survey responses suggest cross-sector interest along most intersections, but the strongest demands centre on the acquisition of both SaaS and management consultancies. 

This is especially true for the major technology services and outsourcing firms such as Accenture, Wipro and Capgemini. Case in point, Accenture’s late October announcement of its intent to acquire OpusLine, a leading consulting firm that provides advisory to healthcare services in France. In line with this, nearly one-in-two respondents (49%) named healthcare and life sciences as their number one priority vertical for 2021 compared to 25% last year. 

As a result of the pandemic, we’ve seen healthcare leapfrog financial services to become the most ‘in-demand’ vertical among professional services buyers. With a second wave and ongoing uncertainty looming, investing in healthcare services and advisory looks a stable bet for the medium to long term.

With buyers still looking towards North America – 47% named it their geography of highest interest – it’s likely we will see more deals in the vein of private equity fund OpenGate’s November acquisition of Aurotech, a digital strategy and transformation services provider for US federal healthcare agencies.

“Investors want more resilient, longer-term managed services models,” says Jerome Glynn-Smith, Managing Director at Equiteq. “There’s been a rapid growth in the desire to buy skills in and around digital services. 

Going forward, what can buyers expect from professional services M&A? In all likelihood, an acceleration of services business trying to find the right investment strategy for assets that have a product element to them. We will also see further breadth and dominance from the largest companies in the world as they continually seek to transform and create new ecosystems for services. Amazon’s under-the-radar acquisition of Health Navigator in October, seems an early indicator of this. 

And the takeaway for sellers? “Buyers want businesses that can optimise processes, automate operations and enable them to use more leading edge technology in the way they work,” says Sylvaine Masson, Equiteq’s Director of M&A Services in APAC. “Anyone who can do this will have an edge.”

More information? Download Equiteq’s ‘Global Buyers Report 2021’.