Merger Activity Heating Up in Consulting and Beyond as Business Shifts to Post-Pandemic Mode

"In the last four months of 2020, there was a combination of pent-up deals that didn't get done in the second quarter of 2020, plus the continued push to put money to work, a changing landscape of winners/losers from the effects of COVID, and the desire to get deals closed before year end in the event of tax changes in 2021," says Francois Mallette, Managing Director, LEK.

"We are experiencing continued elevated levels of activity in M&A as both corporate and financial sponsor clients seek to make strategic bets in market sectors, as market trends towards technology accelerated during COVID and as investment dollars continue to look for investment opportunities in M&A when yield is difficult to come by in other asset classes."

Summit Leadership Partners CEO and Founder Dan Hawkins says private equity M&A deal-making has "exploded."

"The limited amount of deals in 2020 created much demand to find companies to buy, and markets to consolidate. PE investors have plenty of funds to deploy and LP's are expecting more activity and returns in the near term."

The pandemic also gave a major boost to companies' digital transformation efforts, resulting in "traditional technology providers looking to rapidly acquire capabilities and talent," says Ranjit Bawa, Principal and US Cloud Leader, Deloitte.

As a survival trait, companies have always had to adapt to changing realities. That flexibility is as important as ever in the aftermath of a global crisis, and can be seen playing out in the newly accelerated strategic approaches many companies are pursuing.

"Companies are rethinking their business models and go-to-market strategies. Also strategic plans are no longer looking at 3-5 year plans, but have adopted 4-6 month horizons! The need for the speed to grow is paramount, and we'll see much more M&A activity with public companies in the next two years. In addition, you will see lots of company owners want to cash out after the pandemic is over. Company founders and even CEO's are exhausted and more likely to move on," says Hawkins.

Technology, Healthcare Among Industries Leading M&A Uptick

The uptick in M&A activity has been more pronounced in certain sectors, with those that were most immediately impacted by the pandemic, like healthcare, food services, and technology, seeing some of the most post-lockdown action.

"Remote working, remote health, digitization of work and healthcare are changing industries as we know it. There's been more M&A and investor growth in health tech in the last 12 months than probably the last three years due to the pandemic," says Hawkins. "Tele-health and virtual life sciences trials are not the future, they are here now and they are here to stay. Many companies are rapidly trying to capture and consolidate a unique digital health solution for treatment, data, diagnosis and analytics."

Another big driver of M&A has been about anticipating demand, which became decidedly more challenging in the midst of last year's pandemic uncertainty. Following years of organic growth , Deloitte has been on an acquisition spree in recent years, completing more than a dozen deals over the last three years in the cloud services/digital space.

"We have been scaling our cloud practice organically for the last 5+ years, but part of our strategy is also to look at specific properties to address niche areas/capabilities to leapfrog the market or accelerate our capability buildout," Bawa says.

"Over the next 2-3 years, we do expect the supply for new cloud/digital/AI skills to better match the demand as increasingly colleges are reshaping curriculums and more and more large firms like ours are training our own talent through dedicated training programs."

Choppy Waters Ahead?

Although M&A activity has spiked over the last several months, there are numerous challenges and difficulties that remain when it comes to completing deals in the current unprecedented environment, including the global economic and political climate.

"There is too much volatility and unpredictability in the global economy. Also, we have alienated our nation economically and politically over the past several years. Most M&A activity will be focused domestically unless you have a dominant global player taking more share. I do not see predominantly US-based companies venturing out for international M&A for at least two more years," Hawkins says.

The lack of client facetime resulting from the pandemic has also made due diligence a much different process than in the past.

"Clearly M&A In the times of COVID is tough, i.e., due diligence without physically meeting the teams, spending time together is certainly tricky," says Bawa.

"At the same time, there is continued uncertainty in some markets/industries, customer defaults resulting in unpredictability in revenue projections, etc. However, usually extra due diligence, validating fundamentals, a lot of video conferences, triangulating via customers, and ecosystem partners all help minimize pitfalls and get to a good answer."

The last year changed everything, but what remains to be seen is which of those changes are permanent. If things return to normal too quickly, it could result in some buyer's remorse if acquisitions are made expecting current trends to continue indefinitely.

"There is a concern that after COVID 'is over,' consumers and customers will return to their pre-COVID behavior and the new normal into which investors are acquiring will turn out to be the old normal, and those acquisitions don't benefit from a sustained change of behavior," Mallette says.

The uneven economic recovery could also be a factor that affects the desired outcomes for companies clamoring to taking part in the flurry of M&A activity.

"There continues to be heavy competition for most deals, which is leading to higher valuations. If the global economy takes longer than anticipated to recover, the performance of acquisitions may not reach the financial targets on which valuations are based," says Mallette.

Consolidation in Consulting

The consulting industry thrives in times of change, and the last year has seen more than its fair share. M&A activity has also ticked up within consulting itself in recent months for a number of reasons.

"Between COVID and ongoing macro trends in consumer behavior, the evolution of technology, the rise of Millennials as an important segment of consumers, tariff changes, political changes, etc., there are a lot of changes taking place, which companies turn to consultants to help address. As a result, consulting businesses are attractive acquisition candidates," says Mallette.

"The consulting market can be fragmented in many areas, which means margin improvements may be achievable with scale from consolidation," he added.

From Hawkins' perspective, consolidation in the consulting in the consulting industry can be chalked up to two main factors.

"Bigger consulting players want larger service offerings to grab more of their clients spend, and they want it fast. Many larger firms are realizing it is faster and easier to buy your way into a new market or consulting capability than develop it organically. There seems to be a race by the large management consulting players to have a complete suite of services to ensure their competition cannot sneak in the back door," he says.

"The second driver is that many of the smaller consulting firms are feeling the pain of the pandemic's economic impact. The volatility that boutique firms can feel during an economic downturn can scare even the successful ones into being bought. Those consulting firms with niche areas of expertise see the benefit of launching their services in a larger firm with multiple channels and customer segments."