The rise of consultancies to drive M&A activity

September 19, 2019

A rise in the use of external advisors by the public service and large listed companies is set to drive a new wave of M&A activity in the consulting sector.

The growing use of consultants, by the public service in particular, has been the subject of significant debate in recent months, with some arguing that outsourcing advice devalues the role of professional public servants and turns them in to “mailboxes” for consultant advice to Ministers.

Others, however, argue that the increasing complexity of public policy challenges make it essential to draw expert advice from a wide range of sources.

Regardless of the viewpoint, the evidence shows consulting firms are doing well in Australia. A recent report from Source Global Research found the value of the local advisory market soared to A$7.7 billion in 2018, up nearly 8 per cent from already high levels in 2017 – a rate three times faster than that of the economy as a whole.

There is clearly an increased demand for consulting services, which is creating a shortage of experienced consulting staff. This not only drives up prices and margins but also makes consulting businesses with quality staff potentially attractive acquisition targets.

With only a limited number of potential acquisition targets in Australia, this is likely to drive up acquisition prices in terms of revenue multiples – and indeed there are already signs of this happening.

In June, Accenture announced the acquisition of the privately-held advisory firm BCT Solutions, which services the defence and national security sector. The reported purchase price of A$20 million represents a healthy revenue multiple of more than two.

Accenture followed this up with the recent purchase of big data and analytics consultancy Analytics8, which is also privately held. While terms of the transaction have not been reported, we expect that the price would reflect similarly healthy revenue multiples.

These recent transactions are likely to reflect a broader trend of increasing interest in Australian acquisitions from the large global consulting firms – but also potentially a round of consolidation amongst local players.

There is no doubt that there are buyers in the market for high-calibre Australian consulting firms and their skilled staff, and we might expect M&A activity – and prices – to continue to increase as a result.

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