Consultancy, Consolidation, M&A

Joining forces: Is big consultancy consolidation back on the cards?

There are two views of the cyclical nature of Merger & Acquisition (M&A) activity. One is that it’s part of the normal business cycle. The other is that it’s more akin to binge drinking, whereby people can only drag themselves back to the bar once the memories of the last horrendous hangover have faded away.

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Certainly the markets don’t react to acquisitions, particularly in the consultancy arena, with any enthusiasm. Take LogicaCMG, itself the result of a remarkably sensible merger between Dutch group CMG and UK-centric Logica. Last year the group sensibly filled out its UK footprint with the acquisition of French group Unilog. Now it’s making an equally sensible move into the Nordic market with an £882m offer for WM-Data. In fact, it’s hard to think of anything that LogicaCMG has ever done that couldn’t be described as sensible, yet investors aren’t exactly battering the doors down as yet.

A similar tale could be told with the Management Consulting Group, currently owners of Proudfoot and Parson Consulting, which is now to acquire Ineum, the former French operations of Deloitte. Given that MCG is set up as the holding company for potentially any number of specialist consulting groups, it’s long been expected that another acquisition would come along. Yet even this move, which will see Ineum remain largely as a standalone consultancy, with its financial consulting capability moving to Parson, has raised a few eyebrows. Ineum is seen as a more general purpose business consultancy, which in one sense is highly complementary to, say, Proudfoot’s more process and operations-oriented focus. And it makes sense to strengthen Parson’s financial capability to meet the resurgent Big Four.

I think the problem with getting investors has many roots: one is that the heterogeneous nature of consultancy makes it very difficult to grasp what exactly is being bought. Once you grasp that, it’s even harder to see how the pieces will fit together. Consultancy is very different from, say, advertising, where business models and culture are very tightly constrained, and it’s possible (with a certain amount of care and flair) to stack the pieces together like Lego. This is why the Saatchis succeeded in building up a global advertising empire, but failed to repeat the trick when they tried to build a global consultancy by check book.

It’s very, very hard to grasp the endgame in consultancy. The nature of the market – the ever-changing pattern of client needs – means that consultancies must twist and turn and flex in often unpredictable ways. This is why so many consultancies end up like Woolworth’s, happy to sell you a bag of toffees at one end of the store and a laptop at the other.

The other problem for consultancy M&A is that the whole logic of the deals is topsy-turvy. It’s always more about synergies than savings. Most acquisitions start to work when the duplicated staff are sacked, the product lines rationalized and the real estate portfolio cut down. In consultancy the difficult bit is hanging on to the staff and making sure that the service portfolio doesn’t implode. And the changing nature of consultancy means that a traditionally asset-poor business is now trying to find ways to compete with the worldwide footprint of delivery centers associated with the likes of IBM and Accenture.

For the individual consultant, the fear associated with acquisition is not so much redundancy as alienation. That tricky collision of cultures – far too subtle to be captured on an analyst’s scorecard – makes and breaks not only the merger, but often the individual consultant’s career. I’ve lost track of the number of consultants and principals who’ve told me that the great watershed in their lives was when their firm was acquired or merged. The problem is exacerbated these days as so many consultants find themselves part of larger entities, whose long-term goals and M&A direction may be dictated by concerns far from those of the consultancy arm.

But I suspect we may be on the edge of one of those catastrophe-wave moments when a trickle becomes a flood. Ones to watch, in my view are:

Deloitte Consulting: Now that the rest of the Big Four have come out of their shells and officially re-entered the advisory space, will its one-off business model give it the edge or will it fall in line with its peers?

The rest of the Big Four, who are still being a bit mauve for my liking. Watch tactical acquisitions for signs of a deeper strategic intent.

HP: A disappointed suitor for consultancies in the past, and surely its appetite for post-merger integration has been sated? Maybe, but it is now standing toe-to-toe with IBM and needs to build up services and outsourcing muscle.

Capgemini: Now that all the dust has settled, it would be my favorite candidate for a mega-merger, either with another European partner, or for a “get out of jail free” card in North America.

Finally, expect an “I didn’t see that coming” moment. Isn’t it time, for instance, that LogicaCMG did something that wasn’t sensible?

By Mick James