How can buyers of digital consulting firms manage downside risk?

16 November 2021 3 min. read

An exceptional competitive dynamic is driving valuations to unprecedented levels enabled by the accelerating pace of acquisition activity in the digital consulting industry, combined with the scarcity of targets in critical domains such as artificial intelligence, data analytics and cyber security. Tim Breene, a Senior Advisor at PCB Partners, explores how buyers can effectively navigate the risks of high valuations.

For acquirors in the consulting industry, especially those without deep pockets, the dilemma is clear: pay up and bear the risk of overpaying or fold and potentially cede the strategic position the organisation aspires to.

The reality of course is that risk is unavoidable, but the question is can you minimise the downside risk to the point that your company can make a high risk bid in pursuit of its vision. Of course, carefully considered due diligence; deal structures that protect against loss of critical personnel or intellectual property and thorough post-merger integration planning, all play a role in reducing risk.

Tim Breene, Senior Advisor, PCB Partners

But with sky high valuations, testing and clarifying the underlying strategic assumptions, becomes essential by asking such questions as:

  • What has to be true in the external environment for this to be “a good bet”?
  • What discontinuities in the environment would be particularly challenging for the planned combination?
  • How can you reduce the systemic risk inherent in a decision to move forward?

Few acquisition targets on their own are so compelling that they produce a 1+1= 3 economic outcome. More often the synergy effect that the acquiror seeks depends on parallel execution of other moves to advance and differentiate their organisation’s capabilities and adjust the operating model and culture ‘ahead of the curve’.

The reality is that acquisitions make sense when they are a necessary and integral part of your organisation’s strategy for beating the competition and preparing for a future that will continue to change – bringing both new opportunities and challenges.

This is a strategy that builds what best-selling author of ‘Good to Great’, Jim Collins calls a ‘flywheel momentum’. Collins observes that in creating a good to great transformation, there’s no single defining action, no grand program, no single killer innovation, no solitary lucky break, no miracle moment.

Rather it feels like turning a giant flywheel. Pushing with great effort, you get the wheel to inch forward. You keep pushing and it moves a bit faster, builds momentum … until breakthrough.

Defining the flywheel – the 3 to 5 core complementary intersecting strategies for success and progressing them in tandem – sounds easy but like any exercise in precision, any exercise cutting through clutter to the essential core – it is often really difficult. And it gets more difficult as businesses scale to new levels and extend their services further from the original core.

But the clarity achieved by defining the flywheel creates a unity of purpose and a level of ongoing innovation and agility that can make all the difference to whether your organization realizes the full accretive potential of the acquisition you are considering.

About the author: Tim Breene is currently a Senior Advisor at PCB Partners, a global M&A advisory firm serving digital and consulting businesses. The firm works with clients looking to form acquisition strategies, prepare businesses for a sale, or build a business strategy.