The Consulting M&A Market: Back on Top in 2016

Although 2016 started with what initially appeared to be muted M&A activity, we will likely look back on 2016 as a key inflection point for the broad consulting industry. Through an equal combination of both strong volume and values, the consulting M&A market reached new heights and set a high bar for 2017. With 2016 now in the rear-view mirror, we are taking stock of our initial predictions as well as forecasting new ones for the year ahead.

As expected, the cornerstone for premium value this year was growth. Similar to most other industries, the correlation between value and growth in the consulting sector has become crystal clear. Not surprisingly, the runner-up value driver was specialization and deep domain expertise. Leaders in specific niches continue to garner broad interest in the market as acquirers are willing to pay for the intangibles (brand, IP, market position, etc.). Take for example IBM’s acquisition of Promontory, one of the leading financial & regulatory consulting firms based in Washington, DC. Through the transaction, IBM can now quickly market itself as a leader in this highly valued niche. Further, through the deal, not only did IBM expand it’s existing financial consulting capabilities, but it also enhanced the Watson AI platform (Promontory is expected to teach Watson how to monitor and manage regulatory requirements).

Looking at the momentum driven by these two key characteristics (growth and specialization), there are a handful of horizontal categories that come to mind – the first is Cloud Services. Perhaps the top 2016 deal in this arena was Wipro’s acquisition of Appirio, one of the largest independent multi-vendor focused cloud services companies in the market. Not only was this deal notable as it was Wipro’s largest deal ever, but it was a great example of an Indian outsourcing firm stepping up to the plate and winning in a competitive market. Wipro however certainly wasn’t the only firm that showed up to play – IBM made another key acquisition in this space through Bluewolf, the global Salesforce.com implementation firm.  The Although IBM came close, the award for most active this year probably belongs to Accenture, who made several key purchases this year such as DayNine, a leading Workday consulting firm, Nashco, an Australian ServiceNow Firm,  Kurt Salmon, the global strategy consulting firm focused on the retail industry, as well as a number of digital design firms in Europe.

In our conversations with leading global acquirers, among the most sought after horizontals are Innovation/Strategy Consulting, Compliance Related Consulting, and Big Data/Data Analytics Consulting. Companies within these areas continue to show double digit growth rates and have a knack for being able to differentiate themselves in their space. A wide group of buyers from IT Services firms to Engineering companies to diversified consulting firms have all looked to these targets as a means to enhance their capabilities and position.

In addition to the momentum around specific horizontals, the healthcare sector (and more specifically life sciences) stood out as one of the top verticals that attracted the most attention. Two of the most discussed deals in this vertical included IBM’s acquisition of Truven Health Analytics and PAREXEL’s purchase of Health Advances, a leading life sciences strategy consulting firm. The sheer size, complexity, and growth dynamics of this industry have driven a uniquely impressive wave of M&A activity for years and we expect that to continue, especially given the almost certain continued evolution of regulation resulting from the upcoming changing of the guard in Washington. While this has been a common theme in our annual review, there are some new areas that we are watching very closely. The first is blockchain consulting – a rather new and largely misunderstood space that has enormous potential. In fact, it is now challenging to find a leader in any professional services sector that is not investing in the blockchain or related services. Thus far, deals in this space have been limited to the VC world however we expect firms with scale will begin to emerge and transact in the near future. Another space that gained significant attention this year was digital transformation. As we have discussed previously in this blog, there is a convergence happening in the market between traditional consulting firms and marketing agencies. This theme certainly played out this year with a number of interesting deals (Deloitte / Heat, Cognizant / Idea Couture, and Accenture / MobGen). Now more than just a combination of buzz words, this ecosystem has begun to define itself as a true combination of business strategy and digital technologies. Consistent with other rapidly growing niches, the M&A activity around this space will likely grow in 2017.

In the new year we expect M&A activity to remain strong, driven mostly by the need to grow and diversify. The growing universe of strategic buyers of professional services firms is here to stay – expect to see more M&A deals amongst software, services, and data companies. Given the evolving political climate, rising valuation levels, the continued but changing low interest rate environment, and uncertain global macro-economics we wouldn’t be surprised to see a stronger first half followed by a slower second half of the year.  Finally, don’t be surprised to see private equity firms get even more aggressive on value and structure – these firms have an enormous amount of capital that they need to put to work. There may be a number of twists and turns to navigate in 2017, but with so many structural tailwinds in place we expect the market to remain strong.