October 15, 2015

The Carlyle Group Acquires Controlling Interest in PA Consulting

Earlier this month, The Carlyle Group announced its acquisition of a 51% controlling interest in PA Consulting Group, a global management and technology consulting firm headquartered in London. The deal was funded through Carlyle Europe Partners IV, which raised a new multi-billion dollar fund earlier this year invest to mid-sized European companies. The deal, which will need to clear regulatory and pension approvals as well as a shareholder vote (ownership in PA is spread broadly within the employee base) in November, is expected to close in December.

In the 1970’s PA was one of the largest consultancies globally, but increased competition from the MCBs as well as other diversified consulting organizations almost brought PA to the brink of collapse in the early 1990s. Revenue peaked in 2008 at $675 million but declined nearly 30% in 2010 dropping to $500 million. Since 2010, the company has steadily increased revenue at an annual rate of 10-15% bringing it back close to it’s pre-recession levels. Operating profit in 2014 was $81 million. With financial backing from Carlyle, PA is well armed to further accelerate its growth plan via small acquisitions and geographic expansion. PA has historically not been an active acquirer of businesses.

Given the reported enterprise value for PA is $1 billion, the valuation represents 1.5x revenue and nearly 12x operating profit based on 2014 financial results. While it’s hard to exactly ascertain the “true” multiple on earnings given limited data, the revenue multiple is in line with the broader market where multiples have ranged greatly from 1.0x to 2.0x revenue (and higher in some cases).

This is an interesting deal for Carlyle as it represents its third investment in recent years in a professional services consulting business (Booz Allen and Duff & Phelps) – an interesting point because the majority of private equity firms tend to shy away from the consulting model. While the majority of firms still continue to shun the consulting model in general, an increasing number are also looking to carve out the sector as a niche focus for themselves. Private equity firms represent a unique exit for consulting firms given it provides liquidity while at the same time giving autonomy, which avoids the cultural issues that need to be confronted from strategic buyers