Wednesday, October 30, 2013

M&A in the Consulting World: PwC & Booz Co.

From my academic studies and career exploration, I have come across 2 interesting areas that are dynamically changing due to market pressures and regulatory factors: the health care space and consulting services. They are very different domains but they draw surprisingly similar corollaries in terms of their strategies.

Healthcare industry trend
Consolidation of healthcare organizations (HCOs) are escalating as Healthcare Reform is being implemented. HCOs must become part of a health network to meet the standards of an Accountable Care Organization (ACO), to leverage different service members in the network to remain competitive (e.g., steadier patient revenue stream through incentivized referral system), and to spread out the cost of very expensive health IT platforms with the ultimate goal of being able to provide a patient end-to-end service within the network. This environment puts the "UPMCs" of the world in a very good position to gobble up smaller independent HCOs who can no longer remain financially afloat in the current market environment. However, if UPMCs do too much M&A then they risk the chance of having greater scrutiny from the the regulatory agencies for fair competition/ anti-monopoly.

Relevance

Professional services like consulting is facing a similar issue. The consulting industry is dominated primarily by a few key global players (e.g., McKinsey, BCG, Bain & Co., The Big 4, etc.)  in different functional services and whatever is left over in the market is taken up by much smaller independent consulting firms. Consulting service was identified as a lagging industry in this week's McKinsey Quarterly article, "The Strategic Yardstick You Can't Afford to Ignore" and it mentioned that companies can be divided into class systems like our society with high-class rich companies staying rich. What determines whether a company is in the higher class is size and double-digit growth. In the current consulting industry, firms want to offer its client a full-suite of end-to-end services and solutions, from advisory to audit, from strategy to implementation. In the same respect, big firms are gobbling up smaller firms.

Event
http://dealbook.nytimes.com/2013/10/30/pricewaterhousecoopers-to-buy-booz-consulting-firm/?_r=1&

The focus of this blog is on PwC, a Big 4 auditing firm. In 2002, it sold off its consulting arm to IBM because of threats of regulatory smack-down due to conflict of interests (i.e., a firm cannot provide impartial auditing to a client that it already provides consulting services for). PwC then started rebuilding its consulting services and has managed to climb back up as one of the best consulting firms. Now it plans to expand its advisory service and recently it announced it will purchase Booz & Co. These are both 2 very big players.

Significance

This action puts PwC at a very strong advantage in terms of expanding its Advisory services but also brings to question the limits of the M&A strategy in an industry where growth might correlate to a stronger propensity for conflicts of interest and regulatory consequences since it will still have its auditing services. On the other hand, I am sure this move was a response to the changing needs of its clients such as the ones in the U.S. healthcare industry (U.S. is about ~40% of PwC overall business).

http://www.pwc.com/gx/en/annual-review/facts-figures.jhtml

Question

For big firms like PwC that seek growth, what is a good strategy to hedge against the risk of being hit by regulatory agencies for providing services that are ultimately at ends with one another in terms of interests?


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