Artificial intelligence (AI) is no longer the domain of science fiction. Instead, it’s rapidly becoming a dominant force in the Fourth Industrial Revolution – that of digital transformation.
It’s likely that many owners of knowledge-intensive services businesses, such as IT services, media and marketing agencies or consulting firms, will be considering how AI fits into their strategy.
Further, those looking to sell their business in the future would do well to consider how AI might enhance their market position. Buyers are increasingly interested in acquiring knowledge-intensive businesses with these capabilities, which means those demonstrating the foresight to embrace AI sooner rather than later could expect to command a premium valuation.
Knowledge-intensive services firms can achieve faster growth and reduce founder dependency through diversifying management roles, smart succession planning and equity incentive schemes. These steps support higher future exit values, better deal structures and increase the likelihood of achieving earn out targets if key people are retained and share in the earn out.
From the founder’s point of view, introducing equity incentives will probably be one of the largest investments the company makes so it’s really important to get this right.
Too often tax planning takes crowds out the more important process of designing a commercially effective scheme. Tax is important, but an approach that ensures the growth and exit vision is aligned by evaluating how much value to share, with who and over what time period should come first.
Equiteq’s quarterly market updates provide an indicative guide to current M&A market conditions in the consulting industry. However, it should be noted that we typically observe large variations between quarterly M&A volumes, which are not always reflective of longer term trends.
M&A activity was mixed in the second quarter after a strong start to the year. Overall global deal activity in the consulting sector fell by 12% quarter-on-quarter. Deal volumes fell by just 2% on the same quarter last year. The Equiteq Consulting Share Price Index rallied in the second quarter, achieving similar returns to the S&P 500.
DXC Technology acquires Microsoft Dynamics 365 specialist Tribridge
DXC Technology made its first acquisition after forming in April following the merger of CSC and the Enterprise Services unit of Hewlett Packard Enterprise. The technology giant acquired 740-person Microsoft Dynamics 365 consulting firm Tribridge and its managed cloud business Concerto Cloud Services. The deal is expected to enhance the buyer’s consulting offerings focused on clients in health care, government, consumer packaged goods, and professional services.
Tribridge is one of the largest independent integrators of Microsoft Dynamics 365 and is a six-time winner of Dynamics 365 Worldwide and U.S. Partner of the Year. Tribridge will become part of DXC Eclipse, an IT application consulting business acquired by the business in October 2015 for c.$300m.
It’s now well established that millennials are changing the nature of the workplace and businesses need to respond. However, the extent to which millennials are influencing M&A activity – as well as how creating a culture in which millennials can thrive can drive equity value – is yet to receive the same level of recognition.
The importance of millennial views when it comes to M&A was underlined most recently by research from the consultancy EY. This found that almost three quarters (74%) of senior executives consider millennial attitudes and preferences when making M&A decisions.
With millennials a growing section of the workforce, they could be set to influence M&A activity further still. Those organizations that meet their needs and earn their loyalty will become more attractive to prospective buyers – who will naturally gravitate towards firms with an engaged and loyal workforce. That’s because engagement is a major driver of productivity, encouraging people to perform at their best, as well as central to retaining talent. All of these things are crucial to accelerating growth and driving business success.
Also, because a culture that meets the needs of millennials can also help boost engagement amongst the wider organization, focusing on business culture can be an effective way to drive equity value by motivating and engaging the entire workforce.
Clients give knowledge-intensive services firms such as consulting, IT services and media agencies difficult and constantly evolving problems to solve. Markets change, competitors emerge and macroeconomics shift, all of which have an impact on what’s hot and what’s not when it comes to M&A.
That means buyers are attracted to firms with a clear value proposition that transcends service offerings and the capability to respond and deliver a relevant service portfolio in a changing environment. Simply put, a firm is worth more when it is bought for its strategic capability rather than just offering the buyer additional service capacity.
Achieving a relevant and effective service portfolio means more than investing in new service lines, because it’s also important for consulting firms to phase out what is no longer working for the future value of the business.
David Ogilvy explained in his “principles of management” (which took his firm from a start-up to generating billions) that dropping services that have become unprofitable must be driven by management:
“To keep your ship moving through the water at maximum efficiency, you have to keep scraping the barnacles off its bottom. It is rare for a department head to recommend the abolition of a job, or even the elimination of a man; the pressure from below is always adding. If the initiative for barnacle-scraping does not come from management, barnacles will never be scraped.”
A no-surprises and smooth due diligence (DD) process underpins every successful deal, closed on the terms agreed before exclusivity. Ideally confirmatory in nature rather than a voyage of discovery, DD provides comfort to the potential acquirer and helps the vendor agree a better set of share purchase agreement warranties and indemnities. On the flip side, material surprises can lead to adverse re-negotiations and a drawn-out process can be distracting and lead to financial under performance.
There is a golden rule in M&A: issues will fill the available time. Being well prepared and due diligence ready is key to driving a fast completion process, protecting value and shoring up buyers’ confidence.
In some jurisdictions, commissioning vendor due diligence is quite common. It enables sellers to manage the timetable, better prepare for buyer due diligence and by disclosing reports to the final shortlisted parties, mitigates issues while there is competitive tension in the sale process. As ever, the benefits need to be weighed against the costs.