Knowledge Economy Industry and M&A Outlook 2019

By Ramone Param, Director, Equiteq

The following summarizes our five key predictions for business owners in 2019 as discussed in our recently released Knowledge Economy Outlook paper.

1. Economic and political uncertainties will create opportunities for agile consulting companies to develop solutions that can help mitigate the current business risks facing their clients.

In 2018, the Equiteq Knowledge Economy Share Price Index posted its biggest decline since 2008. This mirrored weak performance across broader market indices. After a highly volatile end to the year, we commence 2019 with increased equity market uncertainty led by a range of political and economic risks. Against this backdrop, consulting business owners will need to be aware of the opportunities to position their organizations appropriately in 2019.

During the preparation for the UK’s Brexit negotiations, we observed an example of such agile strategic positioning as new client demand grew for strategy, regulatory and organizational redesign consulting services. Since its creation, the Department for Exiting the EU has worked with various consultancies, including the Big Four, McKinsey, BCG and Accenture. Many of these firms had quickly mobilized new teams as early as 2016, which offered bespoke solutions relating to Brexit concerns of their clients.

2. Businesses across industries will accelerate innovation, creating and utilizing new digital technologies, which will further disrupt consulting firms and their clients.

The Fourth Industrial Revolution is being shaped by companies innovating with new digital technologies faster than ever before. This creates new opportunities for consulting firms and their clients across rapidly changing industries. The high-performing technology sector was a space facing notable disruptions over 2018, illustrating that no industry is protected from transformation in the digital age. Industry transformation is creating new growth opportunities for consulting firms with sector focused advisory offerings.

Accenture is an example of a consulting business with an innovation-led approach that we believe is well positioned for continued growth from assisting businesses with navigating new industry disruptions. The business remains a prolific buyer with a track record of acquiring niche capabilities that build depth in core sector vertical and digital capabilities, as well as breadth across management consulting, technology and media services. Furthermore, recent deal activity suggests that they are also building focused sector vertical capabilities, as exemplified by their acquisition of financial services focused consulting firm Orbium.

3. The abundance of capital available for acquisitions, as well as the limited availability of consulting talent, will fuel robust M&A of sale ready businesses at strong valuations.

There is currently an abundance of capital among strategic buyers and a shortage of talent in hot areas like advanced data analytics and machine learning. We are also observing strong levels of dry powder and robust fund raising among private equity investors. This is driving a range of high-profile mega deals across industries and we expect this market dynamic to maintain current strong deal flow.

Cash and cash equivalents among constituents of the Equiteq Knowledge Economy Share Price Index, 2009 to 2018

Source: S&P Capital IQ (January 2019)

There are currently signs that interest rates are starting to rise, which may impact M&A activity and in particular private equity deal flow. Nevertheless, interest rates remain historically low and monetary policy tightening is expected to be gradual. This will maintain pressure on strategic and financial buyers to put their cash to work on new investments including M&A at premium valuations.

4. The long-term demand for disruptive and innovative consulting firms will not follow traditional cyclical patterns.

The consulting industry is a mature sector whereby spending has typically lagged the economic cycle as companies shift from strategy to operational-focused consulting during a downturn. Although the net impact on client spend is typically negative, the shift in consulting spending provides some cushion to consulting providers during the slowdown. As an economy moves further into a recession, companies will cut consulting spending more aggressively and M&A activity also falls. The uptake in spend is not necessarily immediate when the economic outlook improves.

In 2019, it is unclear whether the global economy will experience continued strong growth or if we are commencing a downturn. Nevertheless, there are a variety of factors that are likely to disturb previous cyclical trends for the industry, the most important of which is the need for businesses across sectors to receive fresh perspectives and to constantly innovate with the latest digital technologies through the Fourth Industrial Revolution.

5. Knowledge-led businesses with a strong culture of innovation and advanced digital capabilities will build value in 2019 and beyond.

The traditional consulting firm and the companies it advises are facing unprecedented transformation in a rapidly changing interconnected digital world where knowledge can be generated, stored and transferred ever more effectively. This shift to the knowledge economy is centering knowledge-intensive companies at the core of economic growth and redefining businesses across industries. Consulting firms and consumers of consulting services that are shaping the Fourth Industrial Revolution need to be rich in knowledge that remains cutting-edge from a culture of constant innovation, which includes a deep understanding of the latest digital technologies that are fusing to enable many of the latest industry transformations.

If you would like to enquire about receiving a full copy of the report, or to discuss your current strategic objectives as a business owner or acquisition strategy as an acquirer, please get in touch.

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