Knowledge economy M&A activity was solid in 2017, with digital disruption driving demand and premium valuations

By Ramone Param, Director, Equiteq

2017 was a year of continued growth for Equiteq and further disruption of business models, which is transforming the industry that we have been tracking for 15 years. The disruption of the traditional consulting model from technology-enabled innovation, combined with economic trends, has led us to transition the definition of our industry coverage from consulting to the broader transforming knowledge economy. Our Global Knowledge Economy M&A report delivers you with actionable intelligence into the latest M&A and equity market trends across the knowledge economy, along with tips on how to consider these findings in the context of growing and selling your consulting or technology firm.

M&A overview in numbers

  • Average deal size increased by 5% to $69.4m
  • Number of deals across knowledge economy dipped by 5% to 2,502
  • 5% increase in the number of deals in the management consulting sector to 863
  • 85% of global deals occurred in North America or Europe
  • Cross-border M&A in APAC accounted for 29% of deals in the region
  • 8% increase in Equiteq Knowledge Economy Share Price Index

Major upheaval of the consulting industry led by digitization

Hot areas for buyer demand included digital transformation consulting, robotics & artificial intelligence, advanced data analytics and healthcare consulting. As outlined in our 2017 M&A trends blog, emerging technologies and digitization continue to have a profound impact on traditional business models within the knowledge economy. As corporations are driven to transform their own businesses by leveraging (or responding to) digital, they are becoming more sophisticated consumers of consulting services and changing how they consume expertise.

This is driving transformations in many traditional consulting firms’ business models, as well as the broadening of their digital transformation advisory offerings. In the constrained talent market, this is resulting in new vertical and horizontal mergers that are redefining the consulting sector. Examples of such deals include Gartner’s acquisition of CEB, BCG’s acquisition of MAYA and Office Depot’s purchase of CompuCom.

Top space for growth in deal activity was management consulting, followed by the media agencies segment

M&A activity in the management consulting sector rose 5% in 2017, with M&A across adjacent industries being a key theme in the space. Strong pricing and competition for assets is also being supported by rising valuations of listed consulting buyers, with substantial capital available for M&A and a desire for new avenues of growth. Deal flow in the media agencies space grew modestly by 1%. Contraction in activity from the struggling leading agency networks was offset by an increase in activity from private equity firms and other strategic buyers, including those from adjacent industries.

Regional overview

North American M&A activity experienced year-on-year growth, led by rises in human resources, management consulting and media agencies M&A. In Europe, deal flow fell after a year of significant political events in the region. Reductions in activity were led by falls in IT services, engineering consulting, human resources and media agencies M&A. In the UK deal volumes fell after a strong prior year of deal flow and particularly contracted following the June election.

In APAC, M&A contracted which may be partially attributed to reduced cross-border deal flow with heightened political tensions between the U.S. and various regions within APAC. In Australia & NZ, deal flow dipped in the first half of the year, although M&A picked up toward the end of the year.

Equiteq Consulting Share Price Index continues to rise

The Equiteq Consulting Share Price Index rose 8% in 2017. The IT services index was the standout performer, rising 22%, followed by the human resources index which rose by 20%.  In contrast, the Equiteq Media Agencies Index contracted by 2%, with the major media networks – WPP, Publicis Groupe, Omnicom Group, The Interpublic Group and Dentsu – experiencing falling share prices. This has been attributed to a variety of factors including drops in digital marketing spend from large clients, the trend of businesses working directly with digital advertising platforms, and rising competition from adjacent segments like management consulting and technology.

Prolific serial acquirers comprised of cash-rich listed buyers, accounting networks and private equity investors

Serial buyers of knowledge-intensive services firms, that have made multiple acquisitions over the last three years, were responsible for 41% of all deals in 2017, representing a drop from 46% in 2016. Accenture was the most acquisitive strategic buyer across global segments, announcing a $1.8bn budget for M&A for the year through August 2018. The budget has been allocated toward deals that enhances its niche capabilities across management consulting, technology services and creative media. Across segments, deal flow continues to be dominated by a variety of listed strategic buyers, with substantial cash balances available for M&A, who in aggregate increased their deal flow on 2016. Apart from PwC and BDO, all of the major accounting networks stepped up their deal flow in 2017. Private equity also remained highly active, with record levels of dry powder for acquisitions.

2018 outlook

Many cash-rich buyers of knowledge-intensive services companies are preparing strategic plans to penetrate new markets via acquisition in 2018. We are receiving rising demand for strategic advice from owners that have received recent unsolicited interest in their businesses, reflecting the positive market fundamentals for sellers. The global economic outlook for 2018 is strong and we expect these trends to continue over the next twelve months.

Read the full report for unparalleled M&A and equity market trends and insights, including tips on how to interpret these trends as an owner of a business in the knowledge economy considering a sale.

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