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

Our presenters
2
Alex White
Managing 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 Param
Associate, 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

Transforming shareholder value
5
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

7
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
12
23% 24%
33%
19% 21%
13%
64% 64%
58%
67% 63%
69%
13% 12% 8%
14% 16% 19%
0%
20%
40%
60%
80%
100%
Mostly organic
Both equally
Mostly 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
13
20 20 20 16 16 15
13 13 10
8
16 20
38 40
37
28
40
40
16
17
17
28
16 10
9 7
10
12
8 15
4 3 7 8 4
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
More than 10
7 to 10
4 to 6
2 to 3
1
DK / depends

Relative volume of acquisition opportunities
Net change: +6 +14 +30 -4 -4 +0
14
31
37
47
28 24 25
44
40
37
40 48 50
25 23
17
32 28 25
0%
20%
40%
60%
80%
100%
Less
No change
More

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
Management
consulting
IT
consulting
Media
consulting
Engineering
consulting
HR
consulting
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
17
Note: Ranking: 1st = 5points, 2nd = 4points, 3rd = 3points
Capabilities:
0
5
10
15
20
25
30
Management consulting
buyers
IT consulting buyers Media buyers Engineering buyers HR buyers Private Equity
EquiteqWeightedScoring
Management consulting IT consulting Media Engineering HR

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
0
20
40
60
80
100
120
140
160
Engineering buyers IT buyers Mgt cons. Buyers Media/Marketing
buyers
HR buyers Private Equity
DemandScoring
Financial services Healthcare Retail Energy Diversified Other
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
Engineering
consulting
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
24
31 30
47
16
40
45
5
23
30
27
16
24
25
15
17
13
7
32
16
10
25
8
10
3
16
8
10
2
3
4
19
13 17 16 12
20
40
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
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
5 3 4 8
15
15 23
23
8
16
10
19
23
27
12
20
30
17
17
10
24
28 10
15
12
10 7
16
12
10
20
9
10
7
12
4
5
15
23
17
23 24
12
20
50
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Less than 6x 6-7x 7-8x 8-9x 9-10x More than 10x It depends / No answer
Mean: 8.2 8.2 7.8 8.7 7.9 7.7 10.0
25

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
8 6 3 4
12 15
6
3 10 4
4
10
41
43
53
40 28
35
45 47
33
52 56
40
0%
20%
40%
60%
80%
100%
100%
90-99%
80-89%
Less than 80%
Mean: 95% 95% 95% 96% 94% 92%
28

Average earn-out period by sector
Mean: 3.0yrs 3.1 yrs 2.8yrs 2.9 yrs 2.5 yrs 2.9 yrs
29
5 3 3
8 4
10
45
37
50
48
64
45
41
53
43
32
28
35
9 7 3
12
4
10
0%
20%
40%
60%
80%
100%
5 years or more
3-4 years
2 years
1 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 sale
Recent 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
Robust demand Dependency for growth
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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Or to speak to us, call +44 (0)203 651 0600

How buyers will spend their M&A budgets in 2017

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Editor's Notes