Intense activity continues
2017 saw a period of intense activity for Livingstone’s business services sector team, from a busy global M&A market and supportive macroeconomic backdrop.
Livingstone analysis reveals the sector to have been the most active for cross-border M&A in 2017 in all its territories, with the exception of DACH, which lagged only the industrials sector in the region. With 1,761 reported ‘inbound’ deals in the sector, North America generated as many transactions as the rest combined. The UK placed second at 672 reported deals, ahead of the Nordics’ 378 transactions.
The key themes underpinning this activity have been structural and opportunistic, global and local. There is plenty of dry powder across the corporate acquirer and private equity communities, with all of them under pressure to deliver superior returns in a low-interest environment – which seems unlikely to change significantly.
Globalization continues to drive M&A activity as service providers seek to support major clients while they themselves expand overseas to access and build share in less developed markets. Private equity, under constant pressure to deploy capital, continues to overcome its aversion to backing people-heavy, asset-light business models which historically proved to be a major obstacle to investing in the sector – or at least to justifying competitive valuations.
The UK continues to be an attractive hunting ground for acquirers and investors seeking to acquire IP and proven platforms in arguably the most developed market for outsourcing. The collapse in sterling – most notably against the following the Brexit referendum in 2016 has offered an added incentive for acquirers seeking to lock-in a 10-15% pricing discount.
Meanwhile, continental Europe continues its late recovery from the global financial crisis, although evidence is emerging of a slow-down in the rate of growth in Q1 2018. The uncertainty of new governments in Italy and Spain may also further impact business confidence in the region.
Looking forward to the second half of 2018, there appears to be plenty of momentum in the sector across all of Livingstone’s core geographies, driven by the same factors of economic growth, and supply and demand, with a surfeit of capital chasing a finite volume of quality acquisition opportunities.
While the sector has never been a significant beneficiary of free trade, with individual nations finding a host of creative ways of maintaining prohibitively restrictive local practices (notably across professional services such as law), the sector should not be complacent about the collateral consequences of the USA’s ‘America First’ policy reset.