GLOBAL M&A UPDATE – Q3 2020

After a sharp Q2 decline in deal flow due to Covid-19, Q3 shows a notable recovery in most markets.

Despite the headwinds of the global health emergency and the resulting economic uncertainty, deal volumes showed a strong bounce-back, with a 20 % quarter on quarter increase in completed deals.

Many of the deals closing in Q3 have been executed largely remotely, with limited direct engagement between sellers and buyers during the process – historically very unusual for a sector so dependent on talent and cultural alignment.

The strength of the M&A rebound showcases the speed of adoption of new ways of engaging customers, deploying technology and streamlining operations to leverage growth opportunities and preserve profitability – as well, in many cases, as the ability to adapt propositions to directly support the pandemic response.

C-19 has accelerated existing medium to long-term trends around digitization. This is driving sustained, competitive demand from multiple buyer and investor groups for knowledge economy firms that bring digital transformation advisory capabilities and service-enhancing digital tools.

These tailwinds have already helped technology services M&A back to year-on-year growth and are supporting improvements in adjacent and converging management consulting and marketing/information services players. The large drop in human capital and engineering deals in Q3, 2020 compared to last year should be considered in light of relatively low overall deal volumes which means those segments are in any case more volatile when compared over a short period – further data points are needed to establish if M&A in those markets will continue to be adversely affected.

David Jorgenson, CEO, Equiteq said “Despite the rising uncertainty about when this pandemic will end, the market is starting to bounce back and adapt to new working practices out of necessity with digital transformation driving the growth. Covid has caused us to change and this change is now our new normal”

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Equiteq’s annual Global Consulting M&A report out now

We’re pleased to announce that our Global Consulting M&A report 2016 is now available. This is the 9th consecutive year we’ve produced this report and it remains the only publicly available information on the global consulting M&A market. It covers consultancies in all sectors, including IT, media, engineering, HR and management consulting.

In our latest report, it is clear that 2015 was a fantastic year for consulting sector M&A deals! Although conditions were generally positive across the broader market environment, the significant upward trend of consulting deal volumes, values and a number of high profile deals all indicate a return to near-peak conditions for consulting M&A, with deal volumes increasing by an additional 9.4% above 2014 across the globe.

Figure 2

When it comes to the deal value range, while headlines will always favour the large-value deals, in the consulting sector we consistently see a large volume of small-value deals. In 2015, this was evidenced by the fact that 35% of reported acquisition values were under US$5m and 70% were under $40m. This reflects a consulting industry that is dominated by small firms, with relatively few firms above $100m in revenue. Transactions under $5m do not often include large buyers and these deals are typically more of a merger than an acquisition, with little cash involved.

Figure 4

Reflecting the overall activity in the market, buyer demand remained strong in 2015, with active buyers across all sub-sectors. Accenture was the top buyer, acquiring 18 consulting firms. And we continued to see significant consulting acquisition activity with global media firms (WPP, Publicis and Dentsu) and large professional services firms (Deloitte, EY and KPMG), who were again among the most prolific buyers.

‘Trade’ or ‘strategic’ buyers account for around 94% of all consulting firm buyers and are seeking some form of synergistic benefit from the acquisition. The remaining 6% of buyers are ‘financial’ or ‘investment’ focused and looking to make a return on their capital. The ratio of these Private Equity (PE) buyers increases to an average of 13% when looking at larger deals (>$20m in value). PE firms have consistently been attracted to consulting sector deals as when they are run properly, there are key financial advantages of the consulting business model over many others, including: high margins, low working capital and quick profit to cash conversion. Looking at the long term view of all global acquisitions in consulting across all deal sizes, we see a relatively steady, year-on-year proportion of buyers coming from the PE community that has continued in 2015.

The outlook for 2016 remains positive, with a cautionary note. We expect continued optimism in the market, at a slightly lower growth rate than we’ve seen in the past couple of years. While market conditions are different now than the last peak in 2007, and there remains some cautious optimism among buyers about near term deal activity, these positive conditions are unlikely to continue for long at current near-peak levels. Sellers should take advantage of the positive deal momentum currently in place.

In future blogs we shall be taking a closer look at the report findings by sector (IT, management consulting, media, engineering, and HR) as well as by geography. If you’re a member of Equiteq Edge, you can download the full report here. If you’re not a member you can sign up to Equiteq Edge now, it takes only moment.