Buyers focused on a smaller number of transformational deals in the first half of the year, as tapering of quantitative easing programs accelerates
By Ramone Param, Director, Equiteq
- Strong rise in average deal size and valuation multiples in H1 2018
- The number of completed deals fell 5% on H1 2017
- Activity remains focused on IT services and management consulting
- Equiteq Knowledge Economy Share Price Index continues to reach new highs
Across the global knowledge economy in the first half of the year, average M&A deal sizes and valuation multiples rose markedly, but the number of completed deals fell. Many buyers pushed ahead with a smaller number of larger transformational deals for their businesses at premium prices in the current low interest rate environment. This is against a backdrop of rising signs that quantitative easing programs are coming to an end across developed economies.
The following trends are discussed in more detail in our recent mid-year M&A update report.
Most deal activity occurred in IT services and management consulting
IT services and management consulting continued to be the largest segments of deal flow across the knowledge economy. There were dips in the number of deals completed in these spaces as compared with the first half of 2017. Buyers appeared to be focused on a smaller number of larger deals. Many of these transformational deals involved prolific private equity (PE) acquirers.
Deal flow in the human resources space rose, supported by a strong global economic outlook and falling unemployment across developed economies. M&A also rose moderately in the media agencies space. Despite the strong economic backdrop, M&A in the engineering segment continued to decline.
M&A transaction statistics by knowledge economy segment
Private equity focused on larger M&A opportunities
Limited acquisition opportunities in hot areas of the knowledge economy and record fundraising placed upward pricing pressure on financial buyers, that were focused on sizable investment opportunities in the first half of the year. There were also some landmark private equity divestments announced, which achieved stellar returns for sellers.
Major deals included Apax’s acquisition of Finnish digital consulting business Solita and Italian management consulting firm Business Integration Partners (Bip). Capgemini’s strategic acquisition of digital consulting firm LiquidHub was a landmark strategic acquisition that provided Indian private equity owner ChrysCapital a 4x return on its investment. The transaction was rumored in the press to have garnered interest from Apax Partners, Cognizant, EY and Accenture.
Equiteq Knowledge Economy Share Price Index reaches new highs
The Equiteq Knowledge Economy Share Price Index outperformed both the S&P 500 and FTSE 100, with strong gains achieved by the management consulting and engineering consulting segments. The management consulting index saw a steep rise supported by large increases in the share prices of FTI Consulting, CBIZ and ICF International.
The knowledge economy index reached new ten-year highs, reflecting the positive investor confidence in the equity markets. The index is at a premium of c.75% as compared with its ten-year average.
Buyers have strong appetite for M&A in H2
It is clear that activity in our sector remains robust and acquisitions continue to be a critical component of the growth strategy for industry players. Over the next twelve months, we are closely assessing the evolution of new digital technologies in exciting emerging spaces like robotic process automation, augmented reality and blockchain. We will also be evaluating how the market responds to the impact of gradual interest rate rises and new political reforms in the US and Europe.
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