Historic year will have long-lasting effects on the services sector
The societal impact of the COVID-19 pandemic has been severe with a significant loss of life and far-reaching economic turmoil. From a business perspective, the global shift to remote work and adoption of technology – Cloud, Automation, Artificial Intelligence, etc. – have led to a decade’s worth of transformative change being implemented in a matter of months.
The larger global players across the services market have sought to enhance resiliency by broadening their portfolios of services, creating comprehensive “One-Stop Shop” offerings, with deep sector vertical expertise across industries. These dynamics have supported an aggressive approach to acquisitions in order to fill perceived holes.
Public markets have largely recovered from the initial shock and currently exceed pre-pandemic valuation levels. Private equity remains flush with cash and buyers are looking for growth. These favorable valuation dynamics support robust M&A activity across the business services segment in 2021, especially when factoring in tailwinds from the vaccine rollout and the expectation of a more stable US political environment.
PA Consulting & Jacobs
Jacobs’ acquisition of PA Consulting is compelling on numerous levels, representing Jacobs’ expansion into high-end, innovation-focused strategy consulting – while simultaneously facilitating PA’s continued geographic expansion in the US – via an outside-the-box, private equity-like deal structure. Some interesting data points (1):
- PA has achieved significant scale with strong growth while maintaining >20% EBITDA margins (2020E EBITDA of $175M on 2020E Revenue of $715M)
- Jacobs has previously purchased assets in the range of 8-10x EBITDA; however, this acquisition is a departure from that at an implied multiple of 13.5x
- PA employees retain 35% of the equity with a growth-oriented incentive structure – profit growth in excess of 12% on a cumulative basis are split 49% to Jacobs and 51% to PA employees
- Jacobs will provide $845M of debt financing and purchase $995M in PA equity for its 65% stake
This transaction reflects the strong demand among the larger global strategic players within the services sector to broaden their portfolios of services across strategy consulting, design, engineering, and digital solutions. The objective is to increase the proportion of wallet share that they capture from their predominantly enterprise client base via a “One-Stop Shop” offering.
Resiliency in M&A Activity
Despite the economic impact of COVID-19 on the global economy, M&A activity for the business services segment remained resilient through 2020, especially in North America (2):
- For many of the Global Systems Integrators (GSIs) and larger players within the services industry, inorganic growth initiatives are viewed just as strategically important as organic growth; consequently, even though global deal volume declined a bit in Q2 2020, activity rebounded right back to normalized levels in Q3
- We have seen these diversified strategic players prioritize targets with expertise in specific, high-demand areas – Cloud, Cybersecurity, Artificial Intelligence – or industry verticals, e.g. Healthcare, Financial Services, Technology
- We have also observed particularly strong interest in ecosystem partners tied to high-growth platforms, including AWS, Google Cloud, Microsoft Azure, Salesforce, ServiceNow, etc.
Salesforce & Slack
Salesforce recently acquired Slack in a $27.7 billion transaction, their largest ever acquisition. Salesforce has been expanding its offerings to include additional enterprise software solutions and their Slack investment represents a significant move towards competing with Microsoft.
- Salesforce’s large direct sales organization and C-suite relationships will drive revenue growth for Slack, similar to the acceleration seen in the aftermath of the MuleSoft acquisition
- Salesforce is aspiring to be a $50bn revenue business in five years, with significant tailwinds from overall digital transformation and continued synergies from recent acquisitions
- For service providers in the Salesforce ecosystem, the market for M&A remains robust with both pure-play Salesforce partners as well as the larger GSIs looking to gain market share
- Based on our collective experience, Salesforce partners are trading at revenue multiple-based valuations that expand with greater scale, with the Infosys/Simplus transaction at >3x Revenue being an excellent example
Appendix and Additional Data
(1) Jacobs Engineering Press release: https://invest.jacobs.com/investors/Press-Release-Details/2020/Jacobs-To-Acquire-Majority-Stake-in-PA-Consulting/default.aspx
(2) Data as of Dec 31, 2020: 451 Research; Business Services M&A activity includes acquisitions of all IT outsourced services companies (e.g., BPO, software development, staffing) and IT services & distribution companies (systems integration, consulting, web and email marketing, VARs) tracked by 451 Research