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Confidential© Equiteq 2016 equiteq.com
Growing equity, realizing value
Buyers Research Report 2016/17
How buyers of consulting firms will spend their M&A budgets in 2017
Vital research for owners of knowledge-intensive services businesses
1
Confidential© Equiteq 2016 equiteq.com 2
Our presenters
Alex WhiteManaging Director, Head of M&A and Strategic Advisory, Europe
(London)
Europe Head of M&A and Strategic Advisory 20 years’ experience as an M&A adviser and private
equity investor with his own experiences buying and selling companies as a principal.
Previously
Founding member and latterly a senior partner of a large generalist M&A practice in an international accounting firm.
Raised £200m of private equity commitments and co-founded an investment vehicle for PE investments in Europe, Middle East and the Americas.
Ramone ParamAssociate, Buyer Coverage and Market Insights
(New York)
Ramone is an Associate in the Market Insights team. 8 years’ M&A transaction advisory and corporate
development experience with high profile corporates, infrastructure funds and private equity.
Previously
Worked with Macquarie Group's Corporate Finance business in London.
Helped build PwC’s Global Corporate Development team and advised PwC’s global leadership team on inorganic growth activities, including the transformational acquisitions of Booz&Co and PRTM.
Confidential© Equiteq 2016 equiteq.com
Agenda
3
About Equiteq
Introduction to the research and survey
M&A activity expectations and demands
– Buyer propensity for acquisitions– Buyer demand by capability– Buyer demand by sector– Buyer demand by region
Buyer evaluation, valuation insights and deal structuring
– Buyer evaluation of acquisition opportunities & minimum acceptable KPIs– Buyer adjusted EBITDA valuation metrics analysis– Buyer approach to deal structuring & earn-outs
Conclusion
Confidential© Equiteq 2016 equiteq.com
Growing equity, realizing value
About Equiteq
Confidential© Equiteq 2016 equiteq.com 5
Transforming shareholder value
Partnering on owners’ growth to exit journey
Transforming equity value Global M&A processes to realise value Capital raising Buy side
Global Buyer Access Deep domain coverage
Client Side Perspective
Sector expertise
M&A expertise
Knowledge led clients
Global specialist
We have been clients
NEW YORK
LONDON
SINGAPORE
SYDNEY
Confidential© Equiteq 2016 equiteq.com
Diversity in experience and relationships
IT services & software
Knowledge rich
Marketing & comm’s
Strategic & operational
Engineering+ technical
services
Interim & Consulting
HR Consulting
Private Equity
6
Confidential© Equiteq 2016 equiteq.com7
Initial Engagement Consulting Financial Advice
Growing equity, realizing value
• Shareholder options
• Valuation & equity gap
• Capability & capacity for equity growth
• Operational & strategic development plan
• Acquisition strategy• M&A• Integration and synergy
• Growth capital• Refinancing• Incentives
• Market proposition• IP, synergy, people• Risk and sustainability
• Operating model
• Profit improvement• Cash release and conversion
• Operational development, succession and smart scaling• Strategic development validation
• M&A strategy
• Global competitive auction process
• Synergy value
• Strategic buyers
• Private equity
Transforming shareholder value
Corporate Finance
Strategic Review
Acquisitions Capital
Growth enabling
Appeal to buyers Performance
Transaction Execution
Confidential© Equiteq 2016 equiteq.com
8
Global M&A
Sold to
Exclusive Financial Advisor
Online Marketing
Sold to
Exclusive Financial Advisor
SAP GRC Consulting
Sold to
Exclusive Financial Advisor
Property Consulting
Sold to
Exclusive Financial Advisor
IT Strategy & Analytics
Acquired
Exclusive Financial Advisor
Project & Change Management
Sold to
Exclusive Financial Advisor
Financial Services
Sold to
Exclusive Financial Advisor
Management
SAP Consulting
Sold to
Exclusive Financial Advisor
IT Services
Sold to
Exclusive Financial Advisor
Strategy & Leadership Consulting
Sold to
Exclusive Financial Advisor
Regulatory Compliance
Acquired
Exclusive Financial Advisor
IT Services
Sold to
Exclusive Financial Advisor
Health Strategy Consulting
Sold to
Exclusive Financial Advisor
Operations Consulting
Sold to
Exclusive Financial Advisor
Management Consulting
Sold to
Exclusive Financial Advisor
Engineering & Project Management Consulting
Sold to
Exclusive Financial Advisor
SAP Consulting
Sold to
Exclusive Financial Advisor
SAP Data Management
Sold to
Exclusive Financial Advisor
Digital Transformation
Confidential© Equiteq 2016 equiteq.com
Growing equity, realizing value
Research introduction
Confidential© Equiteq 2016 equiteq.com
Annual survey of global buyers of knowledge-intensive services businesses
10
Each year, we commission independent research of large consulting firms Equiteq’s Buyer Global Research Report distils large consulting firm M&A sentiment This year includes perspective of both strategic buyers and private equity providers
Buyer type Geographic responsibility of respondent
Confidential© Equiteq 2016 equiteq.com
Growing equity, realizing value
Acquisition activity & trends
Confidential© Equiteq 2016 equiteq.com12
Acquisitions are fundamental growth drivers in next 2-3 years
All -
IT consulting
Engineering consulting
Media & Marketing
Management Consulting
Human Resource 0%
20%
40%
60%
80%
100%
23% 24%33%
19% 21%13%
64% 64%58%
67% 63%69%
13% 12% 8% 14% 16% 19%
Mostly organicBoth equallyMostly by acquisition
Confidential© Equiteq 2016 equiteq.com13
Most large firms are serially acquisitive the next 2-3 years by sector
Mean: 3.63.8 4.3 5.0 3.6 3.3
All -
IT consulting
Engineering consulting
Media & Marketing
Management Consulting
Human Resource 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20 20 20 16 16 15
13.3333333333333 13.3333333333333 108
16 20
38 4036.6666666666667
28
40 40
16 16.666666666666716.6666666666667
28
16 10
8.66666666666667 6.6666666666666710 12
8 154 3.333333333333336.66666666666667 8 4
More than 107 to 104 to 62 to 31DK / depends
Confidential© Equiteq 2016 equiteq.com14
Relative volume of acquisition opportunities
Net change: +6 +14 +30 -4 -4 +0
All -
IT consulting
Engineering consulting
Media & Marketing
Management Consulting
Human Resources 0%
20%
40%
60%
80%
100%
30.6666666666667 36.666666666666746.6666666666667
28 24 25
4440
36.6666666666667
40 48 50
25.3333333333333 23.333333333333316.666666666666732 28 25
LessNo changeMore
Confidential© Equiteq 2016 equiteq.com
Robust demand for acquisitions
15
Values strongest from listed companies able to make earnings enhancing acquisitions General preference for volume and variety with modest optimum size acquisition
Strategic buyers
Managementconsulting
ITconsulting
Mediaconsulting
Engineeringconsulting
HRconsulting
No. of acquisitions expected to be undertaken in the next 2- 3 years: 3.6 3.6 5.0 4.3 3.3
The proportion of buyers expecting acquisitions to be a key driver of growth:
84% 88% 86% 92% 81%
Optimum size of acquisition ($m): 33 41 31 36 24
Average budget for acquisitions in the next year ($m): 53 93 66 83 49
The proportion of buyers seeing fewer opportunities than last year: 28% 23% 32% 17% 25%
Confidential© Equiteq 2016 equiteq.com
Dependency on acquisitions to maintain growth underpinning valuations
16
Confidential© Equiteq 2016 equiteq.com
Target areas of expertise for acquisitions
17Note: Ranking: 1st = 5points, 2nd = 4points, 3rd = 3points
Capabilities:
Management consulting buyers
IT consulting buyers Media buyers Engineering buyers HR buyers Private Equity0
5
10
15
20
25
30
Management consulting IT consulting Media Engineering HR
Equi
teq
Wei
ghte
d Sc
orin
g
Confidential© Equiteq 2016 equiteq.com
The results of our survey show a clear convergence trend
18
Consulting segment convergence
All respondents indicated an appetite to acquire outside of their core segment.
Three key convergence trends Reciprocal interest from Media, IT and
Management Consulting respondents High demand for IT consulting by Media &
Engineering HR consultants seeking Management Consulting
capabilities.
Confidential© Equiteq 2016 equiteq.com
Strongest demand for diversified underlying sector coverage
19
Engineering buyers IT buyers Mgt cons. Buyers Media/Marketing buyers
HR buyers Private Equity 0
20
40
60
80
100
120
140
160
Financial services Healthcare Retail Energy Diversified Other
Dem
and
Scor
ing
Note: Ranking: 1st = 5points, 2nd = 4points, 3rd = 3points
Confidential© Equiteq 2016 equiteq.com
Developed market acquisitions in highest demand
20
North America most acquisitive ROW broadly similar acquisition
appetite European acquirers attach highest
importance to local acquisitions Emerging markets and APAC attach
higher importance to acquisitions outside of region
Japan and Australasia are exceptions Private equity rank emerging markets
more highly than strategic buyers
Equiteq weighted scoring of regional demand
Confidential© Equiteq 2016 equiteq.com
Growing equity, realizing value
Buyer evaluation, valuation insights and deal structuring
Confidential© Equiteq 2016 equiteq.com
Average minimum acceptable KPIs that buyers target on acquisitions
22
Media buyers expecting higher KPIs and HR Consulting lower PE demands reflect focus on higher margin IP enabled consulting businesses
IT consulting
Engineeringconsulting
Media consulting
Management consulting
HR consulting
Strategic buyers
Private equity
Revenue growth 13% 10% 12% 11% 9% 11% 14%
Gross margin 45% 43% 50% 41% 42% 44% 52%
Revenue per employee (USD 000s)
280 250 305 270 240 269 370
Utilization rate 62% 67% 66% 65% 70% 66% 71%
Note: Figures in the table show average results with respect to the minimum acceptable key performance indicators (KPIs) for opportunities to be considered as potential acquisitions by survey participants.
Confidential© Equiteq 2016 equiteq.com
The strength of a target’s Intellectual Property has increased in importance
23
Client base and IP the most important qualitative measure of attractiveness
PE more focused on IP enabled consulting
Software and methodologies most important Private equity often need educating about IP
Equiteq weighted scoring of four types of IP
Equiteq weighted scoring of importance of qualitative metrics
Confidential© Equiteq 2016 equiteq.com24
Buyer EBITDA multiple perspectives : Assuming 20% adjusted EBITDA margins with profits growing 10-20% per annum
Mean: 6.4 6.5 5.8 7.1 6.2 5.6 7.4
All -
IT consulting
Engineering
Media & Marketing
Management Consulting
Human Resources
Private Equity 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
31 3047
16
40 45
5
23.3333333333333 30
26.6666666666667
16
2425
15
16.666666666666713.3333333333333
6.66666666666667
32
16 10
25
8 10 3.33333333333333
16
8
10
23.33333333333333 4
18.6666666666667 13.333333333333316.6666666666666 16 1220
40
Less than 6x 6-7x 7-8x 8-9x 9-10x It depends / No answer
Confidential© Equiteq 2016 equiteq.com25
Buyer EBITDA multiple perspectives : Assuming 20% adjusted EBITDA margins with profits growing 30-40% per annum
All -
IT consulting
Engineering
Media & Marketing
Management Consulting
Human Resources
Private Equity 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
5 3 4 8 1514.6666666666667 23.333333333333323.3333333333333
816
1019.3333333333333
23.333333333333326.6666666666667
12
2030
17.333333333333316.6666666666667 10
24
28 10
15
1210 6.66666666666667
16
1210
20
8.6666666666666710
6.66666666666667 12
45
15
23.3333333333333 16.666666666666723.3333333333333 2412
20
50
Less than 6x 6-7x 7-8x 8-9x9-10x More than 10x It depends / No answer
Mean: 8.2 8.2 7.8 8.7 7.9 7.7 10.0
Confidential© Equiteq 2016 equiteq.com
Average targeted current year Enterprise Value/ EBITDA multiples by buyer group
26
Reported EBITDA valuation metrics different to the adjusted EBITDA multiples that buyers are using Careful thought about buyer universe and convergence opportunities key to maximising value PE market structurally hard wired to invest so should always be considered in a sale process
Confidential© Equiteq 2016 equiteq.com
Correlation of required av. revenue growth and av. EBITDA multiple paid
27
Confidential© Equiteq 2016 equiteq.com28
Proportion of deals involve an earn-out by sector
All -
IT consulting
Engineering consulting
Media & Marketing
Management consulting
Human Resources 0%
20%
40%
60%
80%
100%
8 6 3 412 156.15384615384615 3.33333333333333 10 44
10
40.7692307692308 43.333333333333353.3333333333333
40 28
35
45.3846153846154 46.666666666666733.3333333333333
52 5640
100%80-89%70-79%Less than 80%
Mean: 95% 95% 95% 96% 94% 92%
Confidential© Equiteq 2016 equiteq.com29
Average earn-out period by sector
Mean: 3.0yrs 3.1 yrs 2.8yrs 2.9 yrs 2.5 yrs 2.9 yrs
All -
IT consulting
Engineering consulting
Media & Marketing
Management Consulting
Human Resources 0%
20%
40%
60%
80%
100%
5 3.33333333333333 3 8 4 10
44.666666666666736.6666666666667
5048
64 45
41.3333333333333 53.333333333333343.3333333333333 32
2835
9.33333333333333 6.666666666666673.3333333333333312
4 10
5 years or more2 years1 year1 year or less
Confidential© Equiteq 2016 equiteq.com
The deal structures targeted by survey participants remains broadly in line with the results of last year’s survey and earn-outs continue to remain crucial
30
Average target deal structure for each buyer group
Confidential© Equiteq 2016 equiteq.com
The benefits of preparing for saleRecent Equiteq transactions consideration paid up front
31
0
10
20
30
40
50
60
70
80
90
100
* Includes escrow, balance sheet correction hold-back and other payments inside 6 months
Confidential© Equiteq 2016 equiteq.com
Growing equity, realizing value
Conclusions
Confidential© Equiteq 2016 equiteq.com
M&A market remains strong
33
More buyers seeing fewer new opportunities
Growing convergence trend
Buyers holding course in face of
geo-political events
Confidential© Equiteq 2016 equiteq.com
Transforming equity value
34
Transforming Equity Value
Strategic Review
Equity development
plan
Implement Governance
Buyer insights
Optimisation, sales & and
synergy story
M&A execution
Confidential© Equiteq 2016 equiteq.com
More resources
35
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