Demand for acquisitions set to grow in 2018

Our fourth annual global survey of buyers of consulting businesses delivers current, actionable intelligence in the five segments Equiteq specializes in: Management consulting, IT consulting, Media & Marketing, Engineering consulting and HR consulting. Findings, published today, reveal:

  • Buyers expect to initiate 50% more acquisitions year-on-year
  • Convergence continues to be a key trend as buyers look to diversify
  • 55% of buyers think targets could be better at communicating their market proposition
  • 94% of buyers say it is important to retain management teams post-acquisition
  • Over 70% of targets do not make their IP apparent to prospective buyers
  • Three quarters of buyers expect at least 40% of a target’s clients to be blue chip
  • Deal structures are improving for sellers

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M&A trends amongst buyers indicate the potential for premium valuations in 2017

 Ramone Param, Buyer Coverage Associate, Equiteq.

We’re pleased to be launching our third global research report from our annual survey amongst buyers of knowledge-intensive services businesses. The report delivers current, actionable intelligence that isn’t available from any other source and covers each of the five consulting segments that Equiteq specializes in: Management consulting, IT consulting, Media & Marketing, Engineering consulting and HR consulting.

Demand for acquisitions remains as strong as last year, with respondents expecting to make nearly 4 acquisitions in the next 2-3 years. However, buyers are seeing a slowdown in the growth of new opportunities coming to market. This may be a momentary slowdown, or it might suggest the start of a period of increasing competition for assets, supporting stronger pricing power for selling shareholders of unique knowledge-intensive services businesses.

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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.

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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.