Previously we provided an overview of the three broad categories of consulting firm acquirers – consulting, corporate and investment – and their key acquisition drivers. We then did a deep dive into what to expect from consulting firm buyers and now turn our attention to corporate buyers.
There are big differences between a company that makes most of its revenue from selling products or services and a consulting firm that sells advice. Consulting firms have a different business model, few to no tangible assets (as their people are their assets) and are often much smaller in scale compared to most corporate buyers.
Despite this, there are many examples of corporate buyers paying above market value for acquisitions of consulting firms. So what drives these types of acquisitions?
In practice, the drivers of corporate acquisitions of consulting firms tend to be specific to the sector and particular situation of the acquirer. However, when the differences between corporate and consulting firms are complementary, this can generate large synergy opportunities for corporate buyers to unlock additional future value. We’ll look at two common drivers of consulting firm acquisitions among corporate buyers in turn.
1. Acquiring up the value chain to drive additional down-stream revenue
It is not uncommon for consulting engagements to lead to a large body of work involving change and transformation within the consulting firm’s client. A consulting engagement dealing with changes to the strategic direction or operating model of a company will often result in a long tail of activity to implement and embed the change, as well as involving changes to the key partners or suppliers of the client.
For a corporate service provider, consulting capabilities that provide earlier engagement in a lifecycle of change may direct more revenues their way and also better control the type of service they inherit. As such for some corporate firms, the acquisition of a consulting firm whose work typically precedes the sale of their own offerings may be very attractive as an acquisition target to drive additional revenues.
In our experience, the ability to capture additional core revenue by adding a consulting or advisory capability tends to be a common driver for corporate buyers acquiring consulting firms. When considering corporate buyers, sellers of consulting firms should look across the lifecycle of their engagements and beyond their scope of work to consider the synergies they may offer corporate buyers.
2. Acquiring internal advisory capabilities to enhance the existing business
All companies operate in competition with changing market dynamics. Those that excel have a laser-like focus on improving their offerings in order to retain a competitive advantage. For this reason, many large companies have internal consulting divisions used to improve internal operations and external offerings, but also look to external consultants for specific areas of expertise.
By acquiring the right specialist consulting capabilities, the corporate buyer benefits from a long-term advantage that further enhances the value of their offerings, internalizes this supporting capability and prevents their competition from gaining that particular area of expertise.
Corporate buyers are constantly assessing acquisition opportunities that directly add to their top line. Conversely, the acquisition of a consulting firm that indirectly enhances its core offerings and improves internal efficiencies has an indirect impact. This can make it difficult for a corporate buyer to justify a consulting firm acquisition if the only reason is to gain internal consulting capabilities.
Sellers of consulting firms should think carefully about this type of acquisition. Buyers that pay premium deal values often do so because the seller provides significant immediate and future value to them that only the buyer can realize, above the standalone value of the target. The value premium is therefore often the result of a small proportion of future synergy value being ‘pre-paid’ by the buyer in the purchase priced to beat the competition. However, future synergies are more often driven by direct revenue synergies (cross selling, on selling, etc.) than the indirect revenue synergies (enhanced existing capabilities) described here. As such, an acquisition offer from a corporate buyer to gain an internal capability may not necessarily be the best offer in the market. So the best offer from a corporate buyer is likely to come from one who is both acquiring up the value chain and also gains from internal advisory capabilities.
In the fourth and final part in this series we shall be looking at investment buyers. If you’d like to see the full-length article this blog is based on please click here.
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