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How buyers will spend their M&A budgets in 2017

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These slides reveal the findings of our annual survey of buyers of knowledge intensive services businesses, on their M&A appetite and what makes them tick when evaluating acquisition targets.

We will be revealing our key findings on:

- What sectors are hot?
- Market dynamics - is now a good time to sell?
- Are you the right size and in the right financial position?
- How do buyers evaluate your business?
- What deal structure could you expect to be offered?

The insights presented will help you, the future sellers of consulting firms, to be better informed on key exit strategy questions, by understanding what your potential buyers will find valuable and attractive.

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How buyers will spend their M&A budgets in 2017

  1. 1. 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
  2. 2. Confidential© Equiteq 2016 equiteq.com 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.
  3. 3. Confidential© Equiteq 2016 equiteq.com 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
  4. 4. Confidential© Equiteq 2016 equiteq.com Growing equity, realizing value About Equiteq
  5. 5. Confidential© Equiteq 2016 equiteq.com 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
  6. 6. Confidential© Equiteq 2016 equiteq.com 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. 7. Confidential© Equiteq 2016 equiteq.com 7 Initial Engagement Consulting Financial Advice Growing equity, realizing value • 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. 8. Confidential© Equiteq 2016 equiteq.com 8 Global M&A Sold to Exclusive Financial Advisor Online Marketing Sold to Exclusive Financial Advisor SAP GRC Consulting Sold to Exclusive Financial Advisor Property Consulting Sold to Exclusive Financial Advisor IT Strategy & Analytics Acquired Exclusive Financial Advisor Project & Change Management Sold to Exclusive Financial Advisor Financial Services Sold to Exclusive Financial Advisor Management SAP Consulting Sold to Exclusive Financial Advisor IT Services Sold to Exclusive Financial Advisor Strategy & Leadership Consulting Sold to Exclusive Financial Advisor Regulatory Compliance Acquired Exclusive Financial Advisor IT Services Sold to Exclusive Financial Advisor Health Strategy Consulting Sold to Exclusive Financial Advisor Operations Consulting Sold to Exclusive Financial Advisor Management Consulting Sold to Exclusive Financial Advisor Engineering & Project Management Consulting Sold to Exclusive Financial Advisor SAP Consulting Sold to Exclusive Financial Advisor SAP Data Management Sold to Exclusive Financial Advisor Digital Transformation
  9. 9. Confidential© Equiteq 2016 equiteq.com Growing equity, realizing value Research introduction
  10. 10. Confidential© Equiteq 2016 equiteq.com 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
  11. 11. Confidential© Equiteq 2016 equiteq.com Growing equity, realizing value Acquisition activity & trends
  12. 12. Confidential© Equiteq 2016 equiteq.com 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
  13. 13. Confidential© Equiteq 2016 equiteq.com 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
  14. 14. Confidential© Equiteq 2016 equiteq.com 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
  15. 15. Confidential© Equiteq 2016 equiteq.com 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%
  16. 16. Confidential© Equiteq 2016 equiteq.com Dependency on acquisitions to maintain growth underpinning valuations 16
  17. 17. Confidential© Equiteq 2016 equiteq.com 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
  18. 18. Confidential© Equiteq 2016 equiteq.com 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.
  19. 19. Confidential© Equiteq 2016 equiteq.com 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
  20. 20. Confidential© Equiteq 2016 equiteq.com 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
  21. 21. Confidential© Equiteq 2016 equiteq.com Growing equity, realizing value Buyer evaluation, valuation insights and deal structuring
  22. 22. Confidential© Equiteq 2016 equiteq.com 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.
  23. 23. Confidential© Equiteq 2016 equiteq.com 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
  24. 24. Confidential© Equiteq 2016 equiteq.com 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
  25. 25. Confidential© Equiteq 2016 equiteq.com 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
  26. 26. Confidential© Equiteq 2016 equiteq.com 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
  27. 27. Confidential© Equiteq 2016 equiteq.com Correlation of required av. revenue growth and av. EBITDA multiple paid 27
  28. 28. Confidential© Equiteq 2016 equiteq.com 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
  29. 29. Confidential© Equiteq 2016 equiteq.com 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
  30. 30. Confidential© Equiteq 2016 equiteq.com 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
  31. 31. Confidential© Equiteq 2016 equiteq.com 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
  32. 32. Confidential© Equiteq 2016 equiteq.com Growing equity, realizing value Conclusions
  33. 33. Confidential© Equiteq 2016 equiteq.com 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
  34. 34. Confidential© Equiteq 2016 equiteq.com Transforming equity value 34 Transforming Equity Value Strategic Review Equity development plan Implement Governance Buyer insights Optimisation, sales & and synergy story M&A execution
  35. 35. Confidential© Equiteq 2016 equiteq.com More resources 35 A free source of information, advice and insight to help you prepare and sell your consulting firm Join at equiteq.com/equiteq-edge Or to speak to us, call +44 (0)203 651 0600

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