PA targets ambitious growth with Carlyle investment

30 September 2015 11 min. read

US private equity firm The Carlyle Group has taken a 51% share in PA Consulting Group, one of the globe’s larger management and IT consulting firms. The investment, expected to close in December 2015, values PA Consulting at $1 billion, and will enable the advisory to embark on an ambitious growth strategy.

With over 2,600 professionals in 18 countries, PA Consulting Group is one of the largest consulting firms of the globe. Founded in 1943, the advisory firm provides business consultancy, technology and innovation services to clients across industries, with public sector work representing about half of its revenues.

In 2005 PA, which is owned by its 2,600 employees, had a group turnover of £349 million, and on the back of the previous decade’s golden years (2004 – 2008) turnover climbed spectacularly to £440 million in the year the crisis was unleashed. The financial crisis hit the firm hard, as it did across the consulting industry, and by 2010 PA’s income had dropped to £328 million, 6% below the level of 2005. PA however, through a variety of optimisation efforts, maintained its profitability throughout the crisis years – the firm has every year since 2008 managed to book a positive operating profit as well as bottom-line profit*.

Financials of PA Consulting Group

From 2011 onwards PA Consulting Group returned to growth, and last year booked a group turnover of £423 million, with both fee income (£360 million) and operating profit (£53 million) significantly higher compared to 2013, 7% and 26% respectively. The improved financials were driven by fee income growth across regions – UK (+11%) and Continental Europe (+7%) leading the way – sparked by improved trading performance and better consultant utilisation rates. “Our willingness to think differently, develop bold new ideas and work in commercially innovative ways led to a robust performance across all our other markets,” says PA’s CEO Alan Middleton earlier this year.

With the positive momentum fresh in memory, PA’s management team earlier this year set ambitious goals for the future, aiming to grow the business globally and significantly expand its headcount. Yesterday the firm unveiled that as part of the plans, it has brought The Carlyle Group on board, with a total asset base of $36 billion one of the largest venture capitalists of the globe. The agreement sees Carlyle invest in PA for a 51% shareholding of the company**, a deal which values the UK-based consulting firm at $1 billion.

Number of employees PA Consulting Group

With the millions in capital investment, PA will, according to Middleton, have more financial firepower to bolster its footprint. Last year the consultancy entered the Latin American market, with the opening an office in Mexico. Looking ahead, market entry in more greenfield regions is being explored. As part of the growth trajectory, Middleton acknowledges potential acquisitions are on the table, stating: “The structure that we will put in place will give us the flexibility to go after the real big bears in the market. It will give us a few more rounds in our gun.”

PA will however face tough competition buying the cream of the crop – the M&A space in consulting has been heating up over the last two years, following a strong market in among others consultancy powerhouses the US (+9% to >$50 billion), UK (+7% to £6 billion) and Germany (+6% to €6.5 billion). In addition, scale and global presence, along with among others specialisation and a future-proof business model regarded as key trends in consulting’s changing landscape, has led to a push for consolidation, upping the importance of an acquisition-led growth strategy. Data from Equiteq, an M&A analyst firm with a focus on the advisory arena, reveals that the number of consulting deals in 2014 reached its highest level since 2007, at 1,342, of which the majority was in the IT consulting segment. 

Number of deals in consulting industry

Globally the industry has seen several major deals recently. In the HR arena Hay Group was acquired by Korn Ferry for $452 million, while rival Towers Watson agreed to an $18 billion merger with Willis Group. In the technology segment, Capgemini’s purchase of Igate for $4 billion is the deal that catches the most attention, overshadowing dozens of other large deals around, with in particular firms in the cloud consulting segment facing high interest. In management consulting the Big Four have been very active, combined swallowing 60 firms between them last year alone. Even the strategy consulting firms – known for their careful approach to M&A – have been active, with for instance McKinsey & Company buying Lunar and marketing operations firm Agiliti, BCG acquiring TSG (a stake), US-consultancy BrightHouse and S&C In Australia, while back in 2013 PwC’s acquisition of Booz sent a tidal wave through the industry which still can be felt today. 

In the case of PA, the agreement with Carlyle will also work the other way around, helping the consultancy to move away from being a target itself, “allowing us to continue to maintain our independence,” comments Middleton. Other key strategic pillars agreed for the period to come include the development of strong global centres of sector and service expertise, further efforts to raise the profile of PA’s brand (on top of PA’s large ‘Business as unusual’ branding campaign rolled-out this year) and more investment in talent management. At the heart of the latter plan is the launch of PA Academy – a global hub where consultants and engineers can benefit from “world-class learning and development,” says Middleton.

Private equity and consulting

In a reaction to the joining of forces, Eric Kump, Managing Director at Carlyle, says his firm “has long admired PA’s renowned reputation for delivering exceptional results”, adding “PA is at the inflexion point of a new growth phase, and we are excited to support the leadership’s ambitious plans.” The cooperation between the two follows growing interest from venture capitalists in consulting. Last year 15% of deals were financed by PE firms, a feat never seen before in the industry, according to analysts the logical consequence of the major disruption and hence opportunities hitting the industry, paving the way for big bets and returns.

Percentage Financial buyers as percentage of total deals

Major consulting deals and investments are however notoriously difficult, particularly when two groups’ cultures clash, with the fallen-down deals between A.T. Kearney and Booz & Company in 2010 and Roland Berger and Deloitte still fresh in mind. In the case of PA Consulting and Carlyle being over-ambitious may turn out being the key risk, if the firm does not hold on to a major lesson from its own past. In the 70’s PA was one of the largest consultancies of the globe, yet fierce competition with large guns as McKinsey & Company, Boston Consulting Group and Bain & Company aimed at becoming the largest management consultancy brought the organisation on the brink of collapse in the early 1990s. Following arguably one of the most noteworthy turnarounds in consulting’s history, PA under the leadership of former CEO Jon Moynihan*** (who also introduced the firm’s fully employee-owned business model) regained its flair, laying the foundation for the firm’s successful heritage over the past two decades.

PA is not the first consulting group to be part of Carlyle’s portfolio. In 2008 the private equity firm acquired control of Booz Allen Hamilton. The transaction triggered the business to split into two firms – Booz Allen (focus on US public sector market) and Booz & Company (focus on private sector). Carlyle helped Booz Allen go public in 2010, and since the private equity group has gradually reduced its holding to a minority stake. Booz & Company stayed independent until 2013, when it was bought by PwC Advisory for a reported $1 billion, and since rebranded as Strategy&.

“Carlyle have an established reputation for building value through developing the investments they make and our discussions have borne fruit because the PA team have recognised a cultural affinity between the two groups. Both of us recognise the value of partnership and, in particular, the sharing of value created,” concludes Marcus Agius, Non-Executive Chairman of PA Consulting.

The deal is still subject to regulatory and pension approvals, and requires approval of a majority of the PA staff who own shares at a vote scheduled for November 2015.

* Between 2008 and 2014, profit remained within the range of £19 million (2011) to £49 million (2008).
** The capital comes from Carlyle Europe Partners IV (CEP IV), a European upper-mid market buyout fund.
*** Jon Moynihan retired from PA Consulting Group at the end of 2013.