Sector update Consultancy services Autumn 2014

Transcription

1 Bs Sector update Consultancy services Autumn 2014 Business Services Consultancy M&A driven by increasingly sophisticated client demands The global economic recovery and a progressively complex multi-national operating environment are increasing demand for consultancy services. Consultancies and financial investors are using M&A to pursue growth opportunities and to meet the needs of a more challenging and sophisticated global client base. We expect transaction activity will remain high over the next few years as major players seek to acquire both scale and specialist consultancies in order to broaden reach and maintain margins. Andy Currie Managing Partner, Catalyst Corporate Finance Key observations Delivery models are evolving to meet elevated customer demands Companies are becoming increasingly sophisticated buyers of consultancy services. Hiring behaviour is changing as highly focused assignments which emphasise outcomes and value for money are increasing demand for specialist skills. As a result, new delivery models are emerging as traditional consultancies use M&A to create end-to-end consulting capabilities and new players establish innovative models to grow market share. The need to access growth is driving M&A Many consultancies are increasing their exposure to high growth opportunities to increase revenues. Both major consultancies and mid-sized players are using bolt-on acquisitions to deepen expertise, add new capabilities and widen their geographic presence in industries and regions where demand for in depth skills is strong. Valuations are very attractive for market leaders in these sectors. Private equity increasing investment through buy and build strategy Private equity (PE) is now a key investor in the sector, targeting those consultancies that have developed scalable propositions with essential services. PE is establishing a successful record of developing consultancies and exiting to larger PE and strategic buyers to support further growth.

2 Consultancy firms adapting to prosper in global market place Multinational clients increasingly demand consistent delivery of services. Consultancies achieve this through maintaining strong cultures and deploying systems and controls into their front-line operations. Richard Holden Director, Catalyst Corporate Finance Demand for consulting services is rising as the global economic recovery benefits consultancies end-markets. However, buyers of consultancy services are more sophisticated and are focused on value for money and outcomes through a variety of delivery models. In response, creative business and delivery models are emerging as new players develop innovative approaches and traditional firms try to adapt to increasingly demanding clients. Globalisation of customer base Clients are becoming more multinational. As businesses have become embedded in multiple geographic locations, regulatory environments and cultures, areas such as IT and talent management have become critical success factors. At the same time, consultancies are expected to deliver services where the features, quality and outcomes are consistent across locations and operational environments. Many consultancies have judged that proximity to a client is required to deliver a service effectively. These firms have often developed an international presence by following key clients overseas and then seeded domestic customers around an established contract. Consultancies are also establishing international capabilities in order to access high-growth markets and sectors. Technical consultants such as Arup and Mott MacDonald are using both organic growth and acquisitions to access economies that are driven by natural resources and those benefiting from major infrastructure investment, particularly in the Far East and Latin America (see Figure 1). Specialist recruitment firms are benefiting from the internationalisation of consulting services as often local markets cannot provide the skills required. For example, energy recruitment specialist Spencer Ogden s Dubai office, opened in 2014, will act as a hub to access growth in the Middle East and Africa. Figure 1: Mott MacDonald Group revenue by territory and five year CAGR Americas 30m 12.8% Asia Pacific & Australasia 142m 2.8% Europe & Africa 1m 0.2% Middle East & South Asia 172m.7% Source: Mott MacDonald 2013 revenue figures

3 New delivery models emerging to meet customer demands Globalisation has created a complex operating environment and clients are increasingly hiring specialist consultancies on a best of breed basis to address specific issues. New business models are emerging that are customer-driven rather than sales driven, such as Eden McCallum, a UK network-based consulting firm that provides clients with access to high-quality senior freelance specialists (typically mid-level and senior alumni of top consultancies These models aim to deliver the same quality and range of services as major consultancies, but with the flexible delivery and lower cost associated with a smaller niche firm. For example, XMCS, which was established by ex-big Four consultants, creates bespoke project teams from over 1,700 independent management consultants. A key feature of its model is knowledge transfer and enabling a client to develop self sufficiency post contract. The Big Four, in particular, have been expanding their consultancy services. Consultancy revenues have grown by almost six per cent per annum over the last five years to reach US$39 billion in 2013, compared to just 0.4 percent growth for auditing revenues. Providing a full suite of services from strategy to execution, and therefore gaining access to executive teams and capturing a greater portion of client spend, has driven acquisition activity by these firms (see Figure 2). A feature of this development is the productisation of services and the creation of multiple specialist units delivering well defined services. This enables a fee to be charged per specialism rather than per solution. Rising competition from new business models and increased specialisation is increasing choice for clients and putting more focus on outcomes and costs. This is putting pressure on midsized firms. Ownership models influence exit strategies Ownership and culture influence the ability of an investor or acquirer to enhance value. Mott MacDonald, SLR and Arup are examples of firms with wide spread employee ownership, which they believe achieves a high level of employee engagement, better aligns the firm s interests with those of its clients, sustains independence and facilitates succession planning. Culture is linked to success and changing it, for example, as a result of an acquisition by a trade buyer, is high risk. Broad ownership is often suited to investment by financial institutions, which enables succession whilst retaining independence and maintaining the culture necessary to support significant growth. The culture of consultancies with narrow ownership is often strongly influenced by the founders and succession can be more difficult. Exits are often driven by the need to realise the value built up by a small number of owners and a sale is typically made to a strategic acquirer, which will have its own culture. This can also be a high risk transaction if success has been highly dependent on key individuals who have exited post acquisition. Figure 2: Big Four accountancy firm acquisitions 20 Number of deals EY KPMG Deloitte PwC Source: Capital IQ

4 M&A activity The rapid pace of digitisation and the next round of post-recession globalisation will drive consulting services growth for the next few years. Consultancies must get very big or accept niche roles to survive. From Hitachi s perspective, M&A is the only way to get very big very fast, quickly get to scale in new service and technology areas, and to keep up with client movement around the world. Stephen Brant Executive Vice President, Market Development, Hitachi Consulting Consultancy deal volumes recovered quickly from the post-financial crisis low of 2009 with M&A volumes being driven primarily by strategic buyers (see Figures 3 and 4). Largest players using M&A to meet customer demands Acquisitions are being driven by consultancies reacting to customers increasing demands for deep specialist and local knowledge. Acquirers are targeting firms with high quality brands focusing on high growth industries. To increase revenues, the Big Four are re-building their advisory practices. PwC acquired Booz & Company in 2013, a strong brand which is capable of enhancing PwC s credibility in the strategy arena. The key risk with this acquisition is the failure to retain the main work winners and diluting the culture that made the firm successful pre-acquisition. For EY and KPMG, as well as the pure strategy firms, these acquisitions will encourage further M&A in order to avert a potential loss of market share. Japan s Hitachi has a strategic target to grow revenue from its consulting business to US$1. billion by 201. The 2013 acquisition of business operations consultancy Celerant Consulting by its US subsidiary Hitachi Consulting has added expertise and scale in Europe. A number of deals are driven by the need to acquire consulting expertise in strategically important growth areas. Digitisation, big data and analytics, cyber security and the integration of IT across an organisation s functions mean that the demand for technology-related consulting is high. KPMG acquired IT specialist Xantus to strengthen its strategic advisory service. Deloitte s acquisitions of cyber security specialists Vigilant and Urgentis Digital Crisis Solutions complement its security consulting practice. Hitachi Consulting s recent acquisition of the Information Management Group has strengthened its expertise in the business intelligence and analytics market. Figure 3: Number of deals by industry segment since 2010 Figure 4: Number of deals by rationale Number of deals Capability Geography Market share Private equity 0 Technical consultancies IT consultancies HR consultancies Business consultancies 122 Other Source: Capital IQ from January 2010 to May 2014 Source: Catalyst Corporate Finance

5 The hunt for growth drives international acquisitions Leading firms across all consulting areas are using M&A to gain access to key geographies, deepen expertise and gain scale or market share. Acquisitions are often the fastest way to enter a specific market segment and targets are typically established mid-market firms with less than 100 employees, demonstrating that acquirers are using lower risk bolt on acquisitions rather than transformational deals to achieve market growth (see Figure ). US-based Aon outbid private equity to acquire Lorica Employee Benefits. Demand for employee benefits such as healthcare is increasing and changes to UK pensions regulations will drive demand for consulting services. This acquisition will enable Aon to grow its offering in the UK, adding around 0 percent to its market share in the areas where Lorica is strongest. Higher growth regions and sectors are particularly attractive investment areas. Mott MacDonald acquired Brazilian environmental engineering consultancy Habtec Engenharia Ambiental in 2013 as part of its strategy to create a regional base in Brazil to deliver services across South America. French engineering consultancy Altran s acquisition of UK-based Sentaca Communications strengthens its existing offering, footprint and client base in the high growth wireless telecoms market. Acquisitions also reflect the growing importance of talent management as a business success factor. For example, Corporate Executive Board s (CEB) acquisition of SHL, the world s largest provider of talent assessment solutions, provides it with access to SHL s Talent Analytics service, which provides employee benchmarking data. Valuations Using the discounted valuations of the quoted professional services firms as a proxy for sentiment towards the whole sector, Figure 6 shows that the highly cyclical HR firms have the highest rating (9.3x EBITDA multiple), benefiting from improving economic conditions and rising market confidence. Firms which are achieving a high valuation are typically innovative market leaders in high growth sectors like energy. For example, Hellman & Friedman acquired energy consultancy Wood Mackenzie from Charterhouse for 1.6x EBITDA in Given the favourable economic outlook and positive momentum in trading conditions, valuations will continue to rise over the short to medium term. Figure : Acquisition targets by number of employees Number of deals < >1,000 Number of employees Source: Capital IQ Figure 6: Professional consultancies valuations index 12x 12x 11x 11x 10x 10x 9x 9x8x 8x7x 7x6x 6xx x4x 4x Jan-12 Jan-12 Mar-12 Mar-12 May-12 May-12 Jul-12 Jul-12 Sep-12 Sep-12 Nov-12 Nov-12 Jan-13 Jan-13 Mar-13 Mar-13 May-13 May-13 Jul-13 Jul-13 Sep-13 Sep-13 Nov-13 Nov-13 Jan-14 Jan-14 Mar-14 Mar-14 HR consultancies HR Business consultancies consultancies Business consultancies Source: Capital IQ 9.3x 9.3x 8.2x 8.2x 8.0x 8.0x 7.4x 7.4x Technical consultancies Technical IT consultancies consultancies IT consultancies

6 PE targeting HR and technical consulting We continue to be attracted to investing in the consultancy sector, working with firms that have brand presence, distinctive cultures and high quality customer relationships. In our experience, these attributes drive significant growth, both in the UK and internationally, and are core to delivering longer term strategic value. Liz Jones Partner, Living Bridge PE is increasing its investment in the sector with 21 deals in 2013, up from 13 in 2012 and 17 in It is most active in the HR and technical consulting sectors, attracted to business models with recurring revenues operating in fragmented markets with the opportunity to implement a buy and build strategy. PE is attracted to businesses with high quality and sustainable revenues, strong margins and a scalable business model. HR and technical consultancies have often developed proprietary methodologies, models or databases where implementation and service outcomes are repeatable and therefore less dependent on specific individuals. Examples of this are YSC s Executive Development Profiling (EDP) assessment tool and its Model of Potential. PE is investing in talent management companies. For example, Living Bridge invested 18 million for a stake in YSC, a global firm of business psychologists, in The investment will support professionalisation and continued international expansion. Growth Capital Partners investment in Chaucer, an international change management consultancy business, will be used to expand Chaucer s customer base in the UK and internationally. PE is pursuing a buy and build strategy around platform investments in the technical consultancy sector, which is expected to grow significantly. ECI Partners-backed employment law and health & safety regulations specialist Citation acquired Bibby Consulting & Support in Energy consultant Inenco Group, backed by Vitruvian Partners and Intermediate Capital Group Plc, is also pursuing acquisitions to help consolidate its position in the UK and expand internationally. PE has a successful exit record PE has used its skills to professionalise and scale services, fund acquisitions and develop international growth. The last three years have seen successful exits to both strategic buyers and financial investors to support future growth. In 2012, Graphite Capital sold NES Global Talent, the international technical recruitment group, to AEA Investors for 234 million, an estimated return of 4.7x. This was followed in 2013 by the sale of Alexander Mann Solutions, a global talent acquisition and management specialist, to New Mountain Capital for 260 million, a return of 3.x. PE has also sold to trade. Staffing agency Allegis s 2011 million acquisition of Aston Carter, the UK s largest independent financial services and IT specialist staffing business, was an exit for Baird Capital Partners, an estimated 3.2x its initial investment. US-based Hitachi Consulting s acquisition of global business operations consultancy Celerant Consulting was an exit for Caledonia Investments.

7 Selected transactions Date Company Country Target Description Acquiror Country Deal Value ( m) Jun-14 EPI Group UK Seismic consulting services Palatine Private Equity UK nd Feb-14 Chaucer Group Limited UK Provides change management consultancy services Growth Capital Partners LLP UK nd Feb-14 Mokum Change Management UK Provides information technology consultancy PricewaterhouseCoopers International Ltd UK nd Oct-13 Booz & Company Inc US Provides management consulting services PricewaterhouseCoopers International Ltd UK nd Oct-13 London Offshore Consultants Ltd UK Marine and engineering consultancy Bridgepoint Development Capital UK nd Oct-13 Alexander Mann Group Limited UK Recruitment process outsourcing and advisory services New Mountain Capital US Oct-13 Sentaca Communications Ltd UK Provides technical consulting services Altran Technologies S.A. France nd Jul-13 Inenco Group Limited UK Energy and utility consultancy Intermediate Capital Group Plc, Vitruvian Partners UK nd Jul-13 Navigant Consulting Inc UK Financial services advisory arm Grant Thornton UK LLP UK nd Jun-13 Application Services Ltd (Provanis) UK Provides Oracle applications consulting services Matchtech Group Plc UK.0 Jun-13 Lorien Engineering Solutions Ltd UK Engineering design and technical consulting services GP Strategies Corp US nd Jul-13 YSC Ltd UK Executive coaching and organisational consulting Living Bridge UK 38.0 Apr-13 Habtec Engenharia Ambiental Ltda Brazil Environmental engineering consulting services Mott Macdonald Group Ltd UK nd Mar-13 Enrich Reward Limited UK Employee benefits consultancy Punter Southall Health & Protection Consulting UK nd Feb-13 EJS Partners Limited UK Provides talent management consulting services The Jacobson Group, Inc US nd Jan-13 Celerant Consulting Limited UK Provides business operations consulting services Hitachi Consulting Corporation UK 80.0 Dec-12 Ecology Consultancy Ltd UK Provides ecological consultation services Temple Group Ltd UK nd Nov-12 Monitor Company Group US Provides strategy consulting services Deloitte Consulting LLP US 73.0 Oct-12 NES Group Ltd UK Specialist recruitment company AEA Investors LP US Oct-12 OEC Consulting AS Norway Project management consulting to the oil & gas industry RPS Group Plc UK 31.0 Aug-12 WSP Group Plc UK Multi-disciplinary professional consulting company GENIVAR Inc Canada Jul-12 Wood Mackenzie Ltd UK Energy research products and consulting services Hellman & Friedman LLC US nd Jul-12 PRPi Consulting Limited UK Asset management remuneration consultant PricewaterhouseCoopers Services Limited UK nd Source: Capital IQ Contact us If you would like to discuss this report in more detail or the opportunities for your business, call +44 (0) Andy Currie Managing partner andycurrie@catalystcf.co.uk Richard Holden Director richardholden@catalystcf.co.uk Jeremy Harrison Director jeremyharrison@catalystcf.co.uk Andy is Catalyst s Managing Partner and has a particular expertise in the business services sector. Deals completed include the sale of Celerant Consulting to Hitachi Consulting, the sale of Navigant Consulting Financial Services UK to Grant Thornton and the development capital investment in Foster + Partners. Richard has over 1 years of corporate finance experience. He leads our Business Services sector team and has a particular focus on consultancies. Richard has completed a number of deals in the sector including the management buy-out of YSC. Jeremy is a highly experienced deal leader and is a member of our Business Services team. He has a particular focus on the education and training industry, completing a number of deals including the management buy-out of learndirect.

8 Selected Catalyst consultancy sector deals MBO funded by Tertiary MBO funded by AEA Investors Sale to Debt funded buy-out MBO funded by Sale to Smart advice Global reach Catalyst advises business owners and management teams on: Company sales Management buy-outs and buy-ins Company acquisitions Raising private equity capital Raising and refinancing debt capital Our international partnership is present in 0 cities worldwide and provides: Access to overseas buyers Identification of overseas targets and acquisition execution International M&A research Local insight into M&A culture and likely tactics London Birmingham Nottingham th Floor Grosvenor Gardens London SW1W 0DH 16th Floor, Bank House 8 Cherry Street Birmingham B2 AL 21 The Triangle ng2 Business Park Nottingham NG2 1AE T +44 (0) T +44 (0) T +44 (0) Catalyst Corporate Finance LLP is a limited liability partnership registered in England & Wales (registered number OC306421) Registered Office: Bank House, 8 Cherry Street, Birmingham, B2 AL Catalyst Corporate Finance LLP is authorised and regulated by the Financial Conduct Authority (number )