Big 4 to buy MBB?

WorkHard75:

hahaha right? So can PwC kids move to strategy& now? or is it still difficult even for them?

Not yet. The deal closed less than a year ago. I'd imagine we'll see joint recruiting soon, but as of this summer, the consulting staffs and office locations (mostly) are still distinct.

EY got Parthenon, it went a bit overlooked since they aligned them to the Transaction Services group - so not sure if EY will still be that active. I've actually been waiting to hear to see if and when KPMG will make their move (because they have to in order to stay competitive) - but always assumed they would target someone along the lines of an LEK/Accenture

Can you tell me more? Is Bain really in that big of trouble, or is this exaggeration? This is news to me.

That is 100% false. From what I've heard from people at Bain, they've doing very very well for the past few years with demand outpacing supply of consultants this year. (Several offices had to push up start dates of new starts to meet demand.)

Also, I just can't imagine how backend services would be the reason why a firm has to be bought out. Given how teams operate on a daily basis, that just wouldn't make sense. And the functions that you mentioned are ones that could be augmented or cut flexibly based on need.

Finally, Bain would be a very expensive acquisition, especially given the multiple they'd want. They're considerably smaller than McK or even BCG, but they're also considerably larger than any of the recent acquisition such as Parthenon or Booz (maybe except for Monitor, who had serious business troubles). The next logical targets would be LEK, AT Kearney, or OW who are all in the 1.5-2.5 K consulting staff range (with probably a lower multiple).

This is the dumbest fucking thing I have ever heard.

ofcourse, a standalone bain is arguably more valuable than an integrated one, since a lot of the people will leave, harder to attract talent, brand goes to crap etc. i wouldnt want to pay a 20+x multiple on that. so if the partners at bain want $13bn, but its only worth $8bn (15x multiple), a deal is unlikely to go through

entropy_increases:

i heard from senior partners at my old firm (atk, ow) that Accenture placed a bid on bain but didnt go through due to price. my view is that the primary determinant on buy-out is the concentration of ownership and voting structure at the partnership. as i understand, bain is much more concentrated than the others, and not 1 partner 1 vote. this means that the top dogs with major equity have incentive to sell at a high multiple even if everyone else disagrees. if thats true, then the only thing stopping an acquisition is price. undoubtedly if bain is growing mid double digits with strong profitability and brand, the multiple they would want on earnings would be 25 - 30 even. assuming a 25% net margin on $2bn revenue, that would mean $500 mn earnings x 25 = $12.5Bn. Pretty steep for a cash transaction.

A few big errors in your analysis:

The main asset of consulting firms is the people. These assets are very mobile as they can move companies. As a result...

1) When acquiring a consulting firm, the acquiring firm often asks for a high percentage of the partners to agree to stay on for a period of time. For example, when PwC acquired Booz, only a handful of senior partners had to vote "yes" for the equity vote to pass. However, PwC required > 80% of partners to vote "yes" and agree to stay for four years. In other words, there were two votes, and price is not the only hold-up -- you also have to convince the majority of partners that it's in their best interest.

2) The multiple on professional service firms is a lot lower than 25-30 because of the mobility of the assets. Typical multiple is 50% to 75% of revenue.

Long story short, you're looking at ~$1.5B sales price, and you need the vast majority of partners to agree. Lower price than you said, higher partner buy-in than you said.

Hope it helps.

Good point, Im an outsider looking in trying to figure out how to value the business. Whats the rationale for bolting on the business if no earnings are retained? Perhaps to increase cross-sell to the acquirer and therefore their bonus?

BigPicture:

i heard one argument about the big 4 accounting business being low grwoth but kicking off cash, and thus needing something to invest that cash, but because it's an audit firm the options are more limited. no idea here.

That's a classic example where the extra cash should be distributed to the shareholders (in this case - partners) rather than reinvested by the company itself.

Qayin:

A Big 4 firm buying an MBB would be a terrible deal. There would be no synergies and a lot of value destruction.

A smaller and lower tier firm like Booz or Parthenon can use some big 4 cross-selling opportunities (which an MBB doesn't need), and the hit to the reputation/brand/recruiting allure is not as bad as it would be for an MBB. People and reputation are the two main, if not the only, assets of a consulting firm.

Not only would Big 4 partners have to pay a large premium to the current value, the value of a Big4-owned MBB firm would decrease too. Not to mention the integration hell (culture clash and all). The only potential upside would be the Big4 selling implementation and other low-margin projects to the MBB clients in addition to the high-margin MBB projects. If I see an analysis proving there's even a 10% chance that it's going to outweigh the downsides, I'm going to eat my tie and post the video here.

Terrible, terrible idea (for the buyer - MBB partners would actually have an interesting opportunity for a major cash out).

I agree, especially given the Big4 cannot provide audit services and consulting services to the same client. So it is likely a significant portion of the MBB's accounts would have to be simply "shut down" as soon as they got bought out because they are already audit clients. I don't see that happening. This is where Accenture has an edge over the Big4, they don't do audit.

You may be right about the uncertainty around revenue synergies, but I think you discount the degree to which these mergers - past and future - have been defensive and long-term focused.

Clay Christensen has been talking for years about how the management consulting industry is on the cusp of disruption, predicting that it will go through significant consolidation driven by the low-margin players peddling automated solutions/tech/implementation and eventually eating the strategy firms' lunch. Whether he's right or not, he's the most respected business theorist alive and is adored by consultants. McKinsey has been aggressively building out its lower-margin and tech offerings, quite possibly in direct response to what Christensen says (McK's managing director and Christensen are apparently pretty close). Meanwhile, every old-school strategy firm is sweating, regardless of what their growth rates look like right now during this boom period.

Even if the revenue synergies look questionable right now, you have to admit that an Accenture/Bain merger would theoretically (according to Christensen's theory...) be the ideal response to disruption. Accenture is worried that they wouldn't be able to compete with the even lower-end disruptors (like IBM or future SaaS Silicon Valley-type firms) without a strong competency in strategy, Bain is worried that they will be forced to play in an ever-shrinking, niche high-end market without a big tech/implementation competency. And you can replace Accenture with the Big4/IBM/BAH or replace Bain with Booz/ATK/Monitor/Parthenon/LEK/OW. The latter are all players in the middle of the market that get crushed according to Christensen's disruption theory.

NoName:

Sounds like we have some Bain employees here....

Meh. Maybe, maybe not. The consulting world is really small/incestuous (which you should know if you're at an MBB). They all interview the same small pool of people who mostly know each other. I have very good friends from college (target school) at every major firm (MBB, Deloitte, Accenture, etc.) and know how their offices are doing (in terms of business and recruiting) as well as who their major clients are. Hell, I know at least 5 cross-MBB couples in my friend group.

Don't you think Bain employees would be in an ideal position to evaluate your claim that overloaded back office systems are bring the firm down?

So "someone" from Accenture had access to information, information privy only to the absolut top management of Accenture and Bain, and which should be considered insider information since Accenture is a listed company, and decided to share it with you over the phone?

I don't buy it.