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Global Consulting M&A Review
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Every year, Equiteq publish their Global Consulting M&A Report, which is the only publicly available information on the Global Consulting M&A market. It covers professional services companies across all major industry segments including: management consulting, IT consulting and services, media consulting, engineering consulting and HR services. This presentation presents a summary of these findings and the key implications for consulting firm owners in each core market segment.
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Global Consulting M&A Review
- Confidential© Equiteq 2015 equiteq.com Growing equity, realizing value Global trends in the consulting M&A market - Webinar Global Consulting M&A Review
- Confidential© Equiteq 2015 equiteq.com Equiteq is the leading M&A firm focused exclusively on the consulting sector What we do for our clients Global presence and consulting industry credentials 2 Equity value realization Sale to a Strategic Buyer or Financial Investor Sell 45+ Deals Value creation and sale preparation Between 1 and 5 years ahead of a desired transaction Prepare 300+ Deals Why we’re different • Deep domain expertise in the Consulting sector • Add value and engage at any stage in the exit destination journey • Unique blend of consulting, corporate finance and investment banking skills NEW YORK LONDON SINGAPORE Established in 2004 Regular AMCF USA speaker 35 people across 3 continents Regular MCA UK speaker Clients in 27+ countries Widely published in industry media
- Confidential© Equiteq 2015 equiteq.com How we deliver attractive firms and premium valuations 3 Our Equity Growth Wheel and other tools address your key challenges and ensures you are packaged to be attractive to buyers • Financially stable • Operationally robust • Prepared for a smooth sale • Attractive to buyers • Strong pipeline and forecast • Price reflects future not past • Compelling synergy case SaleYr –1 Yr +3Yr –2 Yr +2Yr –3 Yr +1 Grow value and become transaction ready Get desired exit terms AveragevaluezonePremiumvaluezone Profitandvaluegrowthassurance Synergy value story Optimized return on underlying IP assets Market Proposition Intellectual Property Quality of Fee Income Sales & Marketing Process Consultant Loyalty Client Relationships Sales & Profit Growth Management Quality Equity Growth Wheel Establish validity of Business plan & forecasted profits
- Confidential© Equiteq 2015 equiteq.com (Strategy Consulting firm) Sold to (Global Strategy Consulting firm) Advised on the sale 2015 (Consulting & IT Services) Sold to SEB Advised on sale preparation and sale 2015 (Corporate Intelligence) Sold to Burford Capital Advised on sale preparation and sale 2015 (Oil & Gas Consulting) Sold to SLR Advised on growth, sale preparation and sale 2014 (Property Consulting) Sold to Capita Advised on the sale 2015 Equiteq has transactions in this sector and we have a track record of realising above-market valuations Equiteq has completed over 30 successful transactions since its inception … with several deals currently in the market 4 [Undisclosed] Project Description Country Stage Paradise IT consulting US In Exclusivity/DD Raleigh Specialist SAP services EU In Exclusivity/DD Cabochon FS IT and Change Consulting UK Offers received Dimension Internet web-site optimisation EU Offers Received Lava Oil Advisory US/UK Offers Received ERA Brand marketing UK Receiving Offers Singapore FS Consulting UK Meeting Buyers Globalise Engineering UK Document Prep Milo Planning Consultants UK Document Prep Utah Energy Safety Advisers US Document Prep Arnhem Procurement Consulting UK Document Prep Galen Property Consultancy UK Document Prep Cardinal Business Consulting UK Document Prep (Market Research Consulting) Sold to M-Brain Advised on sale preparation and sale 2014 (International Development Consulting) Sold to AECOM Advised on sale preparation and sale 2014 (Property Consulting) Sold to EC Harris Advised on sale preparation and sale 2014 (IT Consulting, SAP) Sold to Backoffice Accociates Advised on equity growth, sale preparation and sale 2013 (IT Consulting) Sold to EY Advised on the sale preparation and sale 2015 (Disputes Advisory) Sold to Parentebeard, USA Advised on sale preparation and sale 2013 (FS Consulting) Sold to Cordium Advised on sale preparation and sale 2014 (Management Consulting) Sold to FTI Consulting Advised on sale preparation and sale 2013 (Management Consulting) Sold to Baird Capital Advised on sale preparation and sale 2013 (Project and Change Management) Acquired Incite BI Advised on the acquisition 2015
- Confidential© Equiteq 2015 equiteq.com Growing equity, realizing value Context – Global Consulting M&A market
- Confidential© Equiteq 2015 equiteq.com To assess the state of the Global Consulting M&A market, we look at deals and trends in 2014 and provide a perspective on what we are seeing in 2015 6 • Global M&A context – Consulting transaction volumes and values – Strategic and financial buyers of consulting firms – Deal structures • Regional Consulting M&A considerations • M&A within major consulting sectors: – Management consulting – IT consulting – Media advisory – Engineering consulting – HR / HCM consulting • Outlook and implications for 2015 and beyond
- Confidential© Equiteq 2015 equiteq.com Global M&A trends remained strong in 2014 7 • Global M&A has recovered from the Great Recession and the values have been steadily increasing for the last four years - 100,000 200,000 300,000 400,000 500,000 600,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 (£M) Global M&A Deal Values, 2010 – 2015 Q1
- Confidential© Equiteq 2015 equiteq.com Global Deal Volumes (1 of 2): The steady upward trend in the consulting sector continued in 2014 8 • The market has been remarkably consistent since the crash in 2008, with the number of deals largely above 150 a month. • Deal volumes in 2014 were 32% above the 2009 low and are now only 7% below the market peak in 2007. Deal Volumes per Month, 12 Month Moving Average
- Confidential© Equiteq 2015 equiteq.com Global Deal Volumes (2 of 2): The steady upward trend in the consulting sector continued in 2014 9 • Looking at the long term annualized trend, global consulting M&A deal volumes have been consistently above 2000 deals per year since 2009. • Following a minor dip in 2013, 2014 deal volumes recovered with a 13% uplift from 2013 to the highest deal volume we’ve seen since 2007. Global Consulting M&A Volumes
- Confidential© Equiteq 2015 equiteq.com Global Deal Value ranges 10 Deal value Range, 2014
- Confidential© Equiteq 2015 equiteq.com Global Deal Values 11 Global Consulting Sector Transaction Revenue and EBITDA Multiple Medians
- Confidential© Equiteq 2015 equiteq.com Across all consulting sectors, firms in global media, IT and the Big 4 are the most prolific buyers. IT consulting and Digital marketing are the most prevalent targets 12 Top 10 Strategic Buyers of Consulting Companies, 2014 • In 2014, 2,274 targets were bought by 1,722 different buyers, meaning buyers in 2014 acquired, on average, 1.32 targets each. • Consistent with a similar ratio of 1.29 in 2013, illustrating that the overall market is steady – neither consolidating, nor fragmenting – as the ratio of new buyers and new sellers entering the M&A market has remained consistent. • 3 of the top 5 most prolific buyers of consulting firms were in media (WPP, Publicis and Omnicom - 3 of the top global media firms). • Ongoing need for media firms to enhance their technology capabilities, in line with the ongoing impact of digital / social (online) media, customer analytics and cloud-based services that have become common place in the media industry. • Big 4 accounting and consulting firms are prolific buyers of consulting firms. Perpetual competition drove KPMG to significantly increase their acquisition activity globally.
- Confidential© Equiteq 2015 equiteq.com Private Equity is increasingly attracted to consulting as a sector for investment, and 2014 was a record year for PE acquisitions. 13 Financial Buyers, as a Proportion of Deals (over $20m) • Roughly 85% of buyers are categorized as ‘Trade’ or ‘Strategic’, and approximately 15% are ‘Financial’ or ‘Investment’ focused, • PE groups can be attracted to consulting businesses because they consume very little of the high profits they generate on fixed or working capital. • The free cash flow that is generated in many consulting firms can be used to pay back the interest and capital on the loans that are an integral part of PE investments. • We see an increasing proportion of buyers coming from this buyer category. • This is in line with the overall sentiment in the Private Equity buyer community, which is becoming increasingly competitive and thus looking more favorably on the consulting sector to find their returns.
- Confidential© Equiteq 2015 equiteq.com Deal Structures: On average, we see 50%-60% of the deal price paid up-front, with the remainder as an earn-out over two or three years 14 • When agreeing terms for a deal, the people-based nature of consulting firms carries retention risk for most buyers. • To mitigate this, the total purchase price consideration is likely to include a mix of upfront and deferred payment. • This normally covers 4 areas, including: – Cash, both on completion and at agreed future dates; – Equity stage in the acquiring company; – Earn-out, based on future performance, normally in cash; and – Changes in remuneration, particularly above-market salaries or equity partnership status in the acquirer. • Generally, the greater the value multiple a seller seeks to gain, the greater the proportion that will have to be at risk, and hence the initial cash payment will be lower as a percentage of the total consideration. Spread of deal structures in 2014
- Confidential© Equiteq 2015 equiteq.com Growing equity, realizing value Regional Consulting M&A considerations
- Confidential© Equiteq 2015 equiteq.com The key factors that influence foreign acquisitions in the consulting sector is the buyers’ proximity to the cultural, economics and politics of the target’s country 16 Proportion of Deals Where Buyer is from Outside Country (Top 10 Target Countries) Proportion of Deals Where Target is from Outside Country (Top 10 Buying Countries) • If you are selling a firm in Europe, there is a 26% chance that your buyer will be foreign, whereas in the USA it is most likely (88%) that your buyer will be internal. The number of cross-border deals in 2014 is slightly higher than 2013, increasing by 3%. • Looking at countries where buyers acquire foreign firms, Chinese and US companies are the least acquisitive outside of their country, and it is interesting to note that Canada and Netherlands are among the top.
- Confidential© Equiteq 2015 equiteq.com In North America, consulting deal activity increased 21% reaching a 9-year high 17 Volume of Consulting sector deals in North America Area 5-year median 2014 Value Revenue multiple 1.0x 1.0x EBITDA multiple 10.0x 8.8x Revenue and EBITDA multiples in North America Breakdown of Consulting sector deals in North America, 2013 to 2014
- Confidential© Equiteq 2015 equiteq.com In Europe, consulting deal activity increased by 7.4%, despite year on year declines since 2011. The strength of the UK economy helped to balance the declining M&A activity across the rest of Europe. 18 Volume of Consulting sector deals in Europe Breakdown of Consulting sector deals in Europe, 2013 to 2014 Area 5-year median 2014 Value Revenue multiple 0.7x 0.7x EBITDA multiple 8.0x 9.3x Revenue and EBITDA multiples in Europe
- Confidential© Equiteq 2015 equiteq.com Growing equity, realizing value M&A within major Consulting sectors
- Confidential© Equiteq 2015 equiteq.com The 13% global increase in consulting M&A was largely driven by deals in the Media and IT consulting sub-sectors 20 Proportion of Global Consulting Deals by Market Sector, 2014 M&A Volumes by Global Consulting Market Sector – Historical View Sector M&A volumes 2013 deals Increase in 2014 % increase from 2013 Overall Total % increase from 2013 Sector Total 2014 deals Mgmt. Consulting 411 23 1% 6% 434 IT consulting 591 89 4% 15% 680 Media 443 116 6% 26% 559 Engineering 380 (7) 0% -2% 373 HR Consulting 190 38 2% 20% 228 TOTAL 2,015 259 13% n/a 2,274 M&A Volume Growth by Global Consulting Market Sector – 2013 to 2014 View
- Confidential© Equiteq 2015 equiteq.com Deal multiples are highly correlated with the levels of profit and growth in each sub-sector of consulting 21 Publically listed Consulting firms – Sector Profitability and Growth medians
- Confidential© Equiteq 2015 equiteq.com Stock market review – number of deals per sector 22
- Confidential© Equiteq 2015 equiteq.com In Management Consulting, deal volumes have been steady since 2010 and values have increased in that time, indicating increasing demand 23 Management Consulting Deals per Year Two Year Rolling Median of Revenue and EBITDA Multiples in Management Consulting Deal volumes relatively steady since 2010, with an average 434 deals per year. The sector grew steadily in 2014 by 6%, although a modest contribution to the overall M&A growth. Deal value trends increased in Revenue and EBITDA multiples, with 2014 values above 5-year medians With deal volumes steady and deal values increasing since 2010, this highlights an increasing demand from buyers. Several niche areas that consistently achieve high valuations, including Financial Advisory, Healthcare and Analytical Strategy firms. Area 5-year median 2014 Value Revenue Multiple 1.0x 1.1x EBITDA Multiple 9.1x 10.3x
- Confidential© Equiteq 2015 equiteq.com In IT consulting, deal volumes grew by 15% in 2014, driven by the increasing demand for IT capabilities across several industries. Hot IT sectors significantly outperform others in IT consulting. 24 IT Consulting Deals per Year Two Year Rolling Median of Revenue and EBITDA Multiples in IT Consulting IT consulting continued to dominate the global M&A consulting market, with the largest share (30%) of consulting deals by volume in 2014. Driven by proliferation of social, mobile, analytics, cloud and cyber technologies, growth in the broader Technology sector had a significant impact on IT consulting deals. We saw a 15% increase in IT consulting deals between in 2014. This growth was predominantly driven by deals in the US, China, UK and France. The trend in Revenue multiples continued to increase, while EBITDA multiples fell. This is most likely explained by the fact that firms in the IT industry typically drive revenue more aggressively than profits. Area 5-year median 2014 Value Revenue Multiple 0.7x 0.8x EBITDA Multiple 9.5x 8.0x
- Confidential© Equiteq 2015 equiteq.com In Media consulting, deal volumes had a record year, growing by 26%. Deal values are upward trending given the ongoing demand for digital media skills 25 Media Deals per Year Two Year Rolling Median of Revenue and EBITDA Multiples in Media Second largest volume share of consulting deals (25%), but the 26% growth in media deals meant that they contributed to nearly half of the global consulting M&A growth in 2014. Digital Media / Marketing having an increasingly important impact on deals in this space; In value terms, the trend in both Revenue and EBITDA multiples in Media advisory firms increased in 2014. This is largely the impact of the increasing influence of ‘Digital’ in the Media sector, which has broadened the buyer community into this sector to include IT companies, thereby increasing demand and deal multiples in this sector over time. The high multiples in this space are thus heavily weighted towards digital marketing. Area 5-year median 2014 Value Revenue Multiple 1.0x 1.1x EBITDA Multiple 12.2x 12.2x
- Confidential© Equiteq 2015 equiteq.com In Engineering consulting, despite recently declining global deal volumes, there has been increases in N. America and value trends 26 Engineering Deals per Year Two Year Rolling Median of Revenue and EBITDA Multiples in Engineering Consulting This was the only major consulting sector to decrease in deal volumes for the second consecutive year. However, the regional proportion of Engineering consulting deals changed: – Declines of 20% in Europe; – Declines of 34% in Asia Pacific; – Broadly balanced balance by 22% increase in North American deals (bigger market) Deal value trends are on the rise, with the lower supply of firms for sale in the market and steady demand from buyers. However, given the relatively lower profitability and growth of this sector compared to others, we expect the multiples to remain steady or come back down to longer term median values going forward. Area 5-year median 2014 Value Revenue Multiple 0.6x 0.8x EBITDA Multiple 8.4x 8.4x
- Confidential© Equiteq 2015 equiteq.com In HR consulting, deals rebounded and continued the longer term increase, in line with economic growth in the US and Europe 27 HR Consulting Deals per Year Two Year Rolling Median Revenue and EBITDA Multiples in HR Consulting Deals in the HR consulting sector experienced significant growth in 2014. The sector is dominated by recruitment and staffing firms, which are constantly in demand in growing economies. With the largest consulting markets (US and UK) growing in 2014, this contributed significantly to the growth of M&A deals in this sector, largely driven by growth in the North American and European (UK) markets. However, competition also increased which resulted in lower prices/fees, and given the relatively low profitability in this space the net effect was a reduction in both deal multiples and share trading multiples in 2014. Area 5-year median 2014 Value Revenue Multiple 0.5x 0.4x EBITDA Multiple 7.8x 6.1x
- Confidential© Equiteq 2015 equiteq.com Growing equity, realizing value Outlook and Implications
- Confidential© Equiteq 2015 equiteq.com Outlook and implications 29 Macroeconomic context for 2015 Growth in the US, the largest consulting M&A market, will continue to drive global deal volumes upwards, balanced by a slowing Chinese economy and increasing uncertainties in other markets • Macroeconomics and political factors show a mixed picture. In the largest M&A market for consulting firms (United States), the appreciating dollar, the lowest unemployment rate since the Credit Crunch and falling oil prices are expected to be the growth drivers. • On the other hand, The Federal Reserve stopped the Quantitative Easing (QE) programme in 2014, and markets are predicting the Fed will raise the interest rates in 2015 as the economy is expected continue growing without government stimulus. • The depreciating Euro will make European acquisitions more affordable for US companies, however the political friction and social instability in Europe raise concerns. • China, the largest Asia / Pacific economy, forecasts it’s growth to be 7% in 2015, which would be the slowest in two decades. • Australia is demonstrating an economic stability with prudent policy making, close trading relationships with China and well-targeted fiscal stimulus. Global Consulting M&A Outlook Given the macroeconomic situation and trending M&A volumes and values, we expect a high level of overall deal activity in 2015. It is a good time to sell! • As stated in the macroeconomic context, there is significant uncertainty in certain regions regarding economic forecasts and the impact of this on the global consulting market is also uncertain. • As such, while the global consulting M&A sector is broadly enjoying a positive seller’s market, with growing volumes and values, we are not advising interested sellers to wait to begin sale processes. These are very good conditions for selling a firm.
Hinweis der Redaktion
- First I’d like to tell you a little about Equiteq. I’ll be brief but I do want to say a little about: who we are; and How we think about the market, which influences our discussion today. Equiteq is an M&A advisory firm focused entirely on the consulting sector. So 100% of our work is done with clients who are consulting & prof services firms Founded in London in 2004 and we have a global presence across Europe, the US (in NYC office) and Asia Pacific (out of Singapore). We are different for 2 reasons: Consulting is in our DNA – We approach M&A advisory from a consulting perspective. We believe this allows us to provide better advice to our clients in this sector. We have: Expert groups – in London and New York that focus on Market Research and Deal Documentation; and Transaction experts – who lead deals and focus on transactional engagements. … (continues on the next slide)
- (continued from the previous slide) 2) Second major point of differentiation is our ability to assist in the strategic equity improvement of our clients, through our knowledge of the sector and our proprietary Equity accelerator improvement program. On the screen you will see our framework for equity growth in consulting firms. This is: A proprietary model developed by Equiteq that is designed to provide consulting firm owners and shareholders with a scorecard of their equity value We use this in engagements where we prepare a company for sale, AND in deals to ensure we understand the value proposition of a firm and preparedness for sale, before we take them to market
- So enough about us… What I’d like to talk to you about today is an overview and commentary on our recently published 2015 Global Consulting M&A report, which you can find on our website. This is the latest iteration of this annual report, in which we track all consulting firm transactions across the globe and provide data and insights on a broad spectrum of M&A activity within and across the consulting sector. While the full report covers significantly more than we have time for today, I do want to provide you with an overview and the material points coming out of recent M&A analysis in this space. So this will cover: Our current market for consulting M&A, as evidenced by recent transaction activity; and What this tells us about the relative health of the market for the sale of consulting firms;
- So to that end, we hope that today’s webinar will provide you with some additional perspectives, commentary and context on the information in our report. So the key topics today will include: Trends in the macro economy and how this impacts global consulting transactions; We will provide an outline of global M&A activity, including transaction volumes and values, deal structures and strategic and investment buyers; We will talk about some regional considerations for consulting M&A transactions; And we will cover major trends in the core consulting sectors; We will then wrap it up with some outlooks and implications for the balance of 2015 and beyond All of this is intended to outline the current market for M&A across the consulting landscape and provide some intelligence for those considering a transaction at this time
- So with that, it is important to contextualize this discussion with an outline of the relative health of the M&A market as a whole. This chart reflects the value of M&A deals across all industries, globally. The point is that - coming out of the recession, since 2010 we have seen a very healthy, global M&A market. What that means is that the current global environment is broadly supportive of transactions. Now that doesn’t mean a lot for any one specific company, BUT: In the environment we’re in (experience a couple of recessions in our recent history where transactions have dropped off a cliff), it is important to understand that following the credit imbalance that occurred in 2008 and 2009, since 2010 we have NOW entered a market where there is very steady and healthy transaction activity. Based on the global M&A data, it feels to us like a very healthy market. And one in which willing sellers and buyers are both seeking a transaction. Also on trend – Corporate buyers are broadly rich in cash and looking to deploy capital to grow. If you think about large global firms, there is a healthy appetite and recognition that they need acquisitions to grow, and that organic growth is limited as a means of satisfying the strategic initiatives of the shareholders of the company. SO this is a broadly positive picture for M&A as a whole.
- Narrowing in on the consulting M&A market, In this chart we show the number of monthly deals in the consulting sector (globally) and a 12 month moving average to highlight the trend. What is important to note is that similar to the prior chart, monthly consulting deal activity has resumed following the downturn in 2009 to roughly 200 consulting deals per month. This is reflective of a healthy consulting M&A environment, where deal activity is steady… Although deals will fluctuate per month, with spikes near the beginning of each year, there is no significant volatility in this market. What is interesting in this chart is that EVEN in the 2008 / 2009 period, which was by far the lowest level of deal activity in the consulting market, there were still 100-150 deals occurring in this space per month! If you compare this to global M&A data for the same period, you would see a much steeper drop. What this tells us is that consulting firm M&A activity has been relatively more defensive and less subject to the cyclical swing. We have found this to be true in the history of tracking this data, which now reflects a very steady and stable M&A market for consulting.
- Looking at the long term annualized trend, this also paints an interesting picture. You’ll see from the chart that global consulting M&A deal volumes have also been consistently above 2000 deal per year since 2009. However, while we see a clear recovery in the number of consulting M&A transactions following the credit crunch, we actually saw a slight dip in activity across all sectors and regions in 2013, thereafter trending upwards again in 2014. This may call into question the stability of the recovery, but a few key reasons for this seem apparent: While there were fewer deals in 2013, there was a relatively high proportion of big deals For example, PwC’s funding had slowed down in 2013 in anticipation of the Booz & Co acquisition in 2014. Also, Deloitte bought Monitor in 2012 and this would have slowed down its acquisitions Furthermore, values were rising significantly in 2013 and this had an overall affect of slowing down deal activity However, we saw that volumes recovered from this small dip in 2014, while values still remain high. While some macro-economic uncertainty started entering the market in 2014, including falling oil prices, lingering difficulties in continental Europe and Japan, and a slower rate of growth in China, the increasing strength of the US and UK economies supported a healthy level of growth in consulting M&A globally.
- We are often asked by some clients about whether they are big enough to be considered for a transaction – the implication being that only firms of a certain size are capable of being acquired. The reality is that within the global consulting industry, a large majority of acquisitions are in fact small-value deals. What we saw in 2014, which is a consistent story year on year, is that about 35% of reported acquisition values were under $5m and 70% under $40m. What this tells us is that the consulting industry as a whole is not only dominated by small firms, but that there is a constant supply of small consulting firms entering the market that are quickly acquired if they succeed, otherwise they can stagnate, are not acquired and/or fail. This aligns with our own experience that growing consulting firms face a number of ‘glass ceilings’ in their growth at the smaller end of the market. Those that manage to break through these glass ceilings tend to be prime targets for acquisition at each level. So press coverage will always favor the large-value deals - this is what we read about the most. But the fact is that there are relatively few consulting firms sold that are above $100m in revenue. Also, as an owner of a small but growing consulting firm thinking about a transaction, it is important to note that the small value deals in the market do not often include large buyers. These deals are typically more of a merger than an acquisition, with little cash involved. This is something to keep in mind for consulting firms at the smaller end of the spectrum here looking for an investor or sale of their firm.
- So let’s talk about the global picture for consulting M&A multiples – basically these are indicative metrics for transaction values in the market. I’d just like to remind you at this point that we’re still looking at an aggregate picture of values across all consulting capabilities and regions, in order to highlight how the industry is doing as a whole. Before I begin, it is worth noting a margin of error that tends to be associated with reported deal multiples. First it is important to remember that multiples are simply a proxy (or back calculation) for the value of a company. Several factors such as growth, profitability, cashflow, and synergies all contribute to the value of a company, so simply saying that a firm is worth, say, 8x EBITDA is not a valuation – it is a back calculation of the price paid as a proportion of EBITDA to contextualize the relative price. Also, multiples reported in the market can look inflated compared to what we see in practice. This is because the price paid for a company is typically based on the forward looking figure (not available to the market), whereas reported multiples are based on the last annual figures (available in the market). As companies that sell tend to be growing, a multiple of price based on the previous years financials will look larger than a multiple based on the current or future year’s financials. So it would be dangerous to simply assume that the reported multiples can be applied to the financials of your firm to arrive at an indicative value for your firms. What we can do is look at the trend in multiples to get a sense of whether values across a sector or region are increasing or decreasing. So the take away here is more about the trend than the absolute multiple. What we’re looking at here is a chart of the annual median EBITDA and revenue multiples for all consulting deals globally. We do this to get a sense of how values across the industry as a whole are trending, which is broadly useful when comparing against other industries. So as we saw before, trends experienced a dip during the crash and have slowly climbed back to pre-crisis levels, following a short dip in the intervening period. In 2014, there was an net upward trend in EBTIDA multiples across the consulting sector, with revenue multiples remaining steady at a 5-year high. Against the backdrop of growing deal volumes in 2014, this highlights an overall seller’s market, where demand from buyers is exceeding supply of sellers in the market, ultimately keeping values high.
- So in our report, we also track the top strategic buyers of consulting firms across all major disciplines. Interestingly in 2014, 3 of the top 5 most prolific buyers of consulting firms were in fact in the media sector, namely WPP, Publicis and Omnicom, 3 of the top global media firms. We know that these firms have historically been frequent acquirers of media advisories and marketing agencies. But what the 2014 data shows us is the ongoing need for media firms to enhance their technology capabilities, in line with the ongoing impact of digital / social (online) media, customer analytics and cloud-based services that have become common place in the media industry. This means that media firms have needed to broadened their scope of acquisitions to include advisory firms in IT, media and management consulting. We also see that of the Big 4 accounting and consulting firms, namely PwC, KPMG, Deloitte and EY, who are consistently amongst the most prolific buyers of consulting firms each year, KPMG made its way into the top 5, beating out the others. We know that these firms are in perpetual competition with one another, and this translates into their deal activity year on year. So we know that KPMG had significantly increased their acquisition activity globally.
- Now I wanted to also highlight a point about investment or financial buyers in this space – effectively the interest of Private Equity in the consulting sector. So consulting or professional services has not historically been a popular sector for Private Equity investment. This is apparent in the historically low proportions of Private Equity involvement in consulting sector acquisitions. Buyers of consulting firms are largely larger consulting firms or other large corporates. From an investor’s perspective, the consulting sector can be perceived to suffer from factors such as: Difficulty of sustaining and forecasting project based work; Reliance on people as the core assets of the company – assets subject to change and attrition; Limited potential for recurring revenue; and Challenges in scaling – with limited operating leverage. While these are some of the potential risks when investing in poorly run consulting firms, those that are well run not only mitigate these risks, but also benefit from many attractive financial aspects of the consulting business model, including: Relatively high levels of profit; Low working capital requirements; High conversion of profits to cash; As the economy has improved, so the proliferation of Private Equity investments in the market has increased. This has created a relative abundance of available private equity ready to be deployed and also pressure to deploy previously undeployed equity. This creates competition amongst PE buyers, who can become commoditized in a competitive auction against strategic buyers. As this has happened, the PE industry has looked to invest in non traditional areas, with a more open appetite towards consulting sector investments, in order to find returns. And we have tracked this year on year. You’ll see the affect here in this chart, as the increasing proportion of Private Equity lead M&A activity in the consulting sector vs. Strategic buyers. In fact, 2014 was a record year for PE in consulting, as 15% of all global consulting deals were done by PE firms. This is a good sign for sellers, for whom PE buyers provide additional options for the right firms.
- To wrap up this section on global consulting M&A trends, it is worth a note here on deal structures. Buyers of consulting firms typically do not like to pay all of the purchase price as an upfront payment, in order to avoid the risk of the human assets walking out the door after they get paid. So buyers often provide a proportion of the purchase price as an upfront payment and have the remainder paid as an earn-out over a number of years based on certain metrics (performance of the firm, retention of staff, etc.). A key question for sellers thinking about a transaction is what proportion of your firms value could you expect to be paid on Day 1 of a completed acquisition. So what we’ve seen in the market in 2014 is that the average upfront payment being 60% of the total value, with 40% remaining as the earn-out. As another consideration, separate from the analysis here of deal structure reported in the market, we have also anonymously surveyed approx. 100 buyers of consulting firms to understand their deal structure preferences. These buyers have said that 45% - 50% of the total purchase price is paid upfront over a 2-3 year period. This is also in line with what we seen in practice with some of our own clients. So based on the market data, we see an average of about 50% to 60% upfront payments for consulting deals, with the balance structured as an earn out.
- So with that coverage of global context, let’s now take focus on some regional considerations
- Firstly, it is interesting to note the dynamics of cross border acquisitions in consulting and the countries where buyers are more likely to look abroad for acquisition targets. We know that the top 10 countries by deal volume account for over 80% of deals done around the world, and cross border deals account for 19% of all transactions. However, it is important to consider why some buyers look abroad for acquisitions vs. others who prefer to acquire in their own market. The graph on the left shows the proportion of deals where buyers are from outside of the listed country. Now we know that the US consulting firms are often a target for foreign buyers so it may seem strange that only 12% of US firms are sold to international buyers, but its important to remember that the US is also the largest market for consulting M&A transactions, so the 12% represents a large absolute number. Countries like Japan and France also had a small proportion of firms sold to foreign buyers in 2014. This can be explained by the economic slump that Japan was in and the relatively localized nature of the French economy, which made investing in those countries less attractive. Its also interesting to note that China’s consulting market had a large proportion of foreign buyers, who were largely from the US, UK and Singapore. It may not be surprising to hear that Canada’s large proportion of deals with foreign buyers were from the US, and South Africa’s foreign buyers were largely from the UK and US. Conversely, the graph to the right shows the proportion of deals where the TARGET is from outside of the listed country, effectively these countries looking internationally for consulting acquisitions. So China and the US are on the bottom of this list, as these markets are big enough to fulfil the internal buyer demand for target acquisitions, whereas a country like the Netherlands has more buyer demand than its supply of consulting firms, so Dutch buyers largely look internationally for consulting targets. There are some obvious factors like the size of the acquiring company, the size of the geographic market they’re in, the desire for geographic diversification, and others that influence a buyer’s decision to look abroad. But it is clear that when most buyers look internationally for acquisition targets in the consulting sector, countries with proximity in terms of culture, economics and politics have a greater influence on their decision than, say, geographic proximity. So for instance, foreign buyers of Australian consulting firms largely come from the UK, a country on the other side of the world, but whose economy, politics and culture are very similar. As a firm thinking about selling your business, it is important to consider whether or not you would be attractive to a foreign buyer looking to enter or expand in your regional market, and if so, consider the cultural implications of having a foreign corporate parent.
- So as I’ve mentioned before, the largest markets for consulting sector M&A deals are the US and the UK, so we track these markets quite closely. Let’s first lets look at what’s happened in both the US and Canada, as the two economies have very close trading ties. North American consulting deal volumes increased by a very healthy 21% in 2014, following a similar dip in 2013 we saw before. However, you’ll see by the graph here that we are now at a 9-year high in terms of deal volumes. The vast majority (93%) of these transactions happened in the US, which itself had a 23% increase in deal volume. We saw that the US economy gained some momentum in 2014 after a relatively sluggish 2010 to 2013. Now we can see here that consulting deal activity has been healthy from 2010 to date, but factors like the increasingly well performing equity and credit markets, increased consumer confidence, low borrowing costs and high corporate cash reserves helped to really fuel M&A activity in consulting in 2014 to a 9-year high! The multiples are at standard levels in terms of revenue and slightly below the 5 year median value in terms of EBITDA. So lets just take that in for a moment. The largest market for consulting M&A has just had a record year for deal volumes. This reflects the fact that it is currently a great time to be selling a US based consulting firm, as we’re in a very liquid market where buyer demand is currently very high.
- European consulting M&A is a source for growth in the overall global consulting M&A market. European consulting deals account very roughly for about a third of all global consulting deals by both volume and value, and Europe is STILL the second largest consulting M&A market in the world. I say STILL because despite the growth of China, India and others in the Asia Pacific region, Consulting M&A activity is still less likely there than in Europe and North America. As some of you may have guessed, the UK is the single largest proportion of consulting deals that happen in Europe. The UK has seen a steady upward trend in consulting M&A relative to all of Europe. Following the 2009 dip, UK deal volumes have seen a much greater rise year on year, and they continued to rise through the 2013 European dip. This highlights the ongoing health of the UK consulting M&A market and its resilience against a recent slowdown in the rest of Europe. And looking at the breakdown of European consulting M&A volumes from a different angle, it becomes clear how much the UK dominates the European consulting M&A market. It is about 3x larger by deal volume than France, a distant second, and 4x larger than Germany. The trend in deal multiple improved in 2014 with EBITDA multiples up 16% from the long term median. So once again, this points to the health of the consulting M&A in the second largest region for consulting deals globally.
- So the core of our analysis focuses on trends within the major sectors within the consulting industry. Now unless you a large diversified consulting firm, one or two of these sectors is likely to be relevant to any one of you, and so we only have time to briefly cover each one. However, I would encourage you to download our report if you’ve not already done so, because we have a lot of focused analysis in each section that is likely to zero in on your specific area.
- So we segment the consulting industry into 5 very specific areas, which are: Management consulting IT consulting and Technology services Engineering consulting Media; and Human Resources consulting. Of course we go further in our analysis to sub segment these core buckets, but these divisions tend to cover most of the firms we look at and advise. The first thing I want to outline to you about M&A across these core sectors in consulting is where most of the deals happen. The pie chart on the right reflects the proportion of deals done in 2014 in each segment, but these proportions remain fairly stable per year.
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