Only a week after A.T. Kearney, Booz called off merger talks, according to WSJ and other media sources, Aon Corp. agreed to buy Hewitt Associates Inc. in a cash-and-stock deal valued at about $4.9 billion in another sign of consolidation in the management-consulting industry.
The two are the latest consulting-industry players to flirt or agree to a deal in recent weeks as firms seek to get bigger to woo more global business. The industry is still suffering from recessionary aftershocks. While work volume has rebounded, average billing rates remain depressed. As a result, bigger firms are looking for ways to grow through acquisitions. And some are finding opportunities to snap up bargains as smaller firms seek the heft to compete.
Midsize firms A.T. Kearney Inc. and Booz & Co. explored a possible merger for about six months before calling off talks last week. Deloitte LLP is hunting for acquisitions. So is PricewaterhouseCoopers LLP, which is in talks to buy Diamond Management & Technology Consultants Inc. for about $50 million.
We should see more consolidation in the consulting sector, where firms are looking for global scale, diversity and additional products and services to cross sell to their clients.
The industry's world-wide revenue sank about 10% last year to $170 billion, and we are looking at 2% growth per year over the next four to five years. Corporate clients are also evaluating consultants' services more skeptically.
At the same time, the biggest firms, such as McKinsey & Co., are gaining more clout, leaving midsized players vulnerable. The biggest 10 consulting firms controlled about 38% of global revenue in 2009.
Industry watchers expect such large firms as Deloitte, PwC, Accenture PLC and Towers Watson & Co.— itself the creation of a merger completed earlier this year—to get more aggressive about acquisitions, with smaller firms in their crosshairs.
One possible target may be midsized Hay Group. The Hewitt deal, the largest in insurance broker Aon's history, would nearly triple the size of the company's human-resources operations, making it a $4.3 billion business by revenue. Aon Hewitt, as the combined consulting and outsourcing operation will be known, would be run by Hewitt Chief Executive Russ Fradin.
Aon has acquired dozens of firms to expand the company's insurance and human-resources arms. The latest deal would give Aon a human-resources consulting operation to rival competing brokerage Marsh & McLennan Cos., whose Mercer and Oliver Wyman units had combined consulting revenue of $4.6 billion in 2009. In an interview, Aon CEO Greg Case said the Hewitt takeover means Aon will be able to offer management-consulting advice more effectively in 120 countries where it already provides risk-management and insurance services because Hewitt's consulting brand is stronger.
Mr. Case said he first approached Hewitt's Mr. Fradin a year ago because "our clients were asking for greater global reach" as they faced increasingly complex issues. Takeover talks intensified during the past two months, he added.
PricewaterhouseCoopers Chairman Robert Moritz expects more consolidation in the industry. "People are looking for ways to enhance revenue and gain market share, so acquisitions in your direct critical core competencies as well as expanding your portfolio are going to be a continued trend," he said.
Mr. Moritz is looking at a number of acquisitions. He said that he wants larger, transformational purchases as well as niche deals to bring specialized skill sets such as regulatory know-how.
He also noted that consultants are continuing to have trouble getting revenue growth through big across-the-board price increases. As we've seen volume increases we've tried to raise some pricing in a balanced way," he says. He said that he expects the pricing pressure to continue for the next couple of years as customers "expect more for less."