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Consulting industry M&A could get boost from EY’s possible split

Dealmaking in the consulting world has slowed after a record-setting pace in 2021, but demand for digital expertise along with a shakeup at one of the Big Four accounting firms should keep the deals flowing.

U.S. consulting-industry mergers and acquisitions have cooled this year due to rising interest rates, Russia’s invasion of Ukraine and increased economic volatility, according to a report from London-based Source Global Research, which tracks the sector. 

Last month saw just 55 deals in the U.S. where a consulting firm was the buyer or seller, the lowest level in the past 12 months. “A series of strong political and economic headwinds had an immediate impact on firms’ ambitions,” according to the report. The U.S. is home to just under half of all consulting deals, Source Global has found. 

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Ernst & Young offices in London

Jack Taylor/Getty Images

Activity should pick up as companies learn to operate in a more turbulent environment, and some big shakeups could be afoot. Big Four accounting firm Ernst & Young might separate its audit practice from its consulting arm as part of a broader restructuring, which could “significantly disrupt” the professional-services sector, said Source Global market trends analyst Ashok Patel. An EY spokeswoman said the firm is “in the early stages of this evaluation,” and no decisions have been made.

“Other firms are already exploring how to respond to the potential changes it would trigger in the competitive landscape,” Patel said. “But the reality is that there is already a big appetite for deals among consultants.” 

That appetite lately is focused on gobbling up firms with digital, artificial intelligence and data-analytics capabilities, according to Tom Rodenhauser, managing partner of Kennedy Research Reports, which tracks the sector. Deals for old-school strategy shops have gone out of favor as firms like Accenture and Deloitte move more into delivering technology products and platforms for clients, he said. When clients were polled by Source Global about what areas they’re planning or making big investments in, “digital transformation” topped the list.

Still, the big professional-services firms are grappling with an increasingly challenging landscape. EY, along with Big Four rivals Deloitte, PwC and KPMG, face increasing pressure from regulators in the U.S. and Europe after high-profile audit failures and calls to prevent lucrative consulting work from weakening their auditors’ objectivity. 

Even if dealmaking declines, clients’ appetite for the work done by consultants at firms like McKinsey & Co., Bain & Co. and Capgemini continues to grow. Companies large and small need help with digital, technology implementations and, increasingly, advice on how to manage hybrid workforces and returning to the office. 

“Workforce and HR issues are expected to permeate the investment agenda in the near future,” Patel said. In a separate analysis, Source Global projects that revenue generated by the major U.S. consulting firms will grow over 10% to $88.1 billion this year, a slight deceleration from the more than 11% expansion seen last year.