How buyers will spend their M&A budgets in 2017

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.


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



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


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

http://www.mercer.com/

Confidential© Equiteq 2016 equiteq.com7

Initial Engagement Consulting Financial Advice


• 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


8

Global M&A

Sold to

Exclusive Financial Advisor

Online Marketing

Sold to


SAP GRC Consulting

Sold to


Property Consulting

Sold to


IT Strategy & Analytics

Acquired


Project & Change Management

Sold to


Financial Services

Sold to


Management

SAP Consulting

Sold to


IT Services

Sold to


Strategy & Leadership Consulting

Sold to


Regulatory Compliance

Acquired


IT Services

Sold to


Health Strategy Consulting

Sold to


Operations Consulting

Sold to


Management Consulting

Sold to


Engineering & Project Management Consulting

Sold to


SAP Consulting

Sold to


SAP Data Management

Sold to


Digital Transformation



Research introduction


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



Acquisition activity & trends


Acquisitions are fundamental growth drivers in next 2-3 years

All -

IT consulting

Engineering consulting

Media & Marketing


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


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


Media & Marketing


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


Relative volume of acquisition opportunities

Net change: +6 +14 +30 -4 -4 +0

All -

IT consulting


Media & Marketing


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


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%


Dependency on acquisitions to maintain growth underpinning valuations

16


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


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.


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


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



Buyer evaluation, valuation insights and deal structuring


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.


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


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


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


Buyer EBITDA multiple perspectives : Assuming 20% adjusted EBITDA margins with profits growing 30-40% per annum

All -

IT consulting

Engineering

Media & Marketing


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


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


Correlation of required av. revenue growth and av. EBITDA multiple paid

27


Proportion of deals involve an earn-out by sector

All -

IT 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%


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


Media & Marketing


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


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


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



Conclusions


M&A market remains strong

33

More buyers seeing fewer new opportunities

Growing convergence trend

Buyers holding course in face of

geo-political events


Transforming equity value

34

Transforming Equity Value

Strategic Review

Equity development

plan

Implement Governance

Buyer insights

Optimisation, sales & and

synergy story

M&A execution


More resources

35

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Date post:	21-Mar-2017
Category:	Business
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How buyers will spend their M&A budgets in 2017

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