[IMGCAP(1)]A growing number of management consultancies are being acquired by Big Four accounting firms, according to mergers and acquisitions lawyer Stuart Cable, a partner at Goodwin Procter. It’s a trend that may or may not extend beyond the Big Four to midsized accounting firms, he indicated.
“For one reason or another, I’ve been involved in several sales of the large, proven consultancies to Big Four Firms,” he said.
“The number of the Big Four that are actively bidding on top-tier management consulting companies is absolutely a trend of some significance,” he said. “They are very, very active, and frequently successful bidders,” he said.
Cable represented a number of management consulting companies in their exit strategy over the last several years. “Among them were the sale of Arthur D. Little several years ago, and more recently the sale of PRTM to PwC, and most recently the sale of Parthenon to Ernst & Young. Additionally, I’m currently involved in two processes where accounting firms are active bidder,” he said.
Is there any particular reason for the trend? “Without pretending to know the full motivation of the accounting firms involved, it’s safe to say that they see significant revenue synergies associated with putting top-tier advisory consulting firms on their global platforms,” Cable said.
“And conversely, the consultancies seem to appreciate fully the global scale of the accounting firms, allowing the individual partners in those firms to sell into a broader and more global network than they can at present.”
But it’s not a given that the accounting firms will be successful in every firm they set out to acquire, Cable observed. “The accounting firms are competing for these consulting firms, not only against one another but against private equity firms, industry players and, to a lesser degree, against other consulting firms,” he said.
“The accounting firms are not winning every one of these competitive processes, but they are vigorous competitors willing to bid aggressively for the top tier management consulting firms,” Cable said. “They’re challenged to a degree by their independence rules but this is not an insurmountable hurdle.”
Is the trend confined to the Big Four, or is there any room for the large regional firms to participate?
“The jury is still out on whether this is simply a Big Four phenomenon or whether it might extend to middle-size firms,” said Cable. “On the one hand we have seen some participation by the next tier of accounting firms, but the global scale and relationship of the Big Four are a competitive advantage in any consideration that might attract the partners of these consultancies.”
“From the perspective of the consulting partners, the special attraction of the Big Four is that they have a global scale that the consulting partners can operate from that is difficult for midsized accounting firms to match,” he said. “In addition, my sense is that the Big Four each have a dedicated mergers and acquisitions budget allocated to the acquisition of consulting firms and other advisory firms. So the Big Four have the advantage of scale and dedicated capital. They also have in each case a dedicated SWAT team accustomed to the nuances of merger and acquisition activity, specifically in acquiring consultancies.”
“A midsized firm can absolutely compete in this area, but they had better be prepared both with knowledge of the process and the structure of these transactions, and a full understanding of the competitive and aggressive nature of the Big Four in winning these acquisitions,” advised Cable.
The attraction for the accounting firms in pursuing these acquisitions is that these consulting practices are more profitable than traditional audit work, Cable indicated. “So in terms of expanding long-term margins, the next group of accounting firms five through ten should be able to not only compete for these properties but also enjoy the same benefit to their bottom line,” he said.
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