Is the ER&D Industry in the Verge of an Accelerated Consolidation?
Several industry observers, and even, the CEO of Altran, Dominique Cerutti, have predicted that following the Altran Aricent move, the ER&D industry would accelerate its industry consolidation.
Is this right? The USD 2bn Aricent acquisition certainly is the largest M&A in the ER&D industry, ever.
And in the past 18 months, there has been quite a bit of M&A happening among mi-sized to large ER&D firms.The most dramatic is PE AE Industrial Partners in the U.S., which has acquired three U.S. staffing and engineering firms: Belcan, CDI, and BHI Energy in less than 18 months. And earlier this week, AE Industrial Partners announced the first asset exchange, with Belcan acquiring the aerospace units of CDI.
Also, still in the US. Samsung Electric acquired Harman (and therefore Harman Connected Services). In Europe, staffing and interim vendor Randstad acquired an IT services and ER&D vendor Ausy. In India, HCL Tech acquired the non-Dassault assets of Geometric.
But, back to the point of Mr. Cerutti:is the Aricent deal going to accelerate the consolidation in the ER&D industry, which is already happening anyway.
In this blog, we are looking at the top ten ER&D vendors, and evaluating their likelihood to acquire competitors of the scale of Aricent, perhaps not an amount as dramatic as USD 2bn, but still significant.
Altran: focusing in the next two years on integrating Aricent and reducing its net debt
Will Altran still have some money left once the capital increase for funding the Aricent acquisition is completed. We estimate that Altran will then have a net debt of EUR 1.3bn, representing a 3.25 net debt/EBITDA ratio. The company has told investors it would, for the next two years, focus on reducing this ratio to 2.5. This rules out any significant acquisition before mid-2020.
Alten: a serial acquirer, preferring small tuck-in targets
The second-largest Er&D vendor, Alten, is a serial acquirer, specialized in small to mid-sized firms, bringing up to 200 consultants. In 2016 Alten acquired ten competitors, representing combined revenues of EUR 120m.In Q1-Q3 2017, it had 6 firms representing EUR 52m in combined revenues. The company has no debt and is currently focusing on two key markets: Germany and the US. Therefore expect a continued flow of tuck-in acquisitions, but not a single large transaction.
HCL Tech: acquisitive and with a bold IP partnership
HCL Technologies was very active in ER&D in 2016 with the acquisition of Butler America and of Geometric, two mid-sized vendors (with respectively revenues of USD 85m and USD 122mn). Since then, HCL Tech seems to have redirected its cash to financing its bold IP partnership with IBM. This is a massive investment, with HCL committed to investing USD 1bn. HCL Tech is a cash-rich organization (with a net cash potion that we estimate to be in the USD 1.3bn-1.5bn range). Yet, across its other businesses (IT infrastructure services, ADM, systems integration, consulting, and digital), it has many priorities. Digital is probably the most pressing one.
AVL: privately-owned and no acquisition track record
AVL is not a candidate for acquisitions, in spite of its size and market recognition in automotive powertrain capabilities and in ER&D overall. The company is privately-owned and this ownsership probably restrict its ability to conduct a large scale M&A. And in fact, the latest acquisition of AVL dates back from 2007.
ÅF: new growth ambitions under new CEO
Under the new leadership of CEO Jonas Gustvasson, ÅF wants to accelerate its M&A strategy of tuck-in acquisitions and also wants to make larger “platform” acquisitions. To fund this expanded M&A strategy, ÅF is giving itself some additional financial flexibility by raising its net debt/EBITA ratio objective from 2.0 to 2.5 over a business cycle. This being said, room for acquisitions is constrained by the fact that ÅF was already at the 2.5 level in Q3 2017. The company will get some more financial flexibility with a profitability back to normality in Q4 2017 and reduced debt levels.
Akka: a specialist of mid-sized acquisitions
Akka is a serial acquired, with an appetite for mid-sized firms (firms with revenues above $50m). Akka has, to a large extent, completed its investment cycle in the Germany, with revenues in the country comparable to those in in its domestic market, France. Akka will unveil its M&A priorities as part of its CLEAR strategic plan in Q1 2018. We suspect the new M&A priorities will include building a nearshore presence, as well as growing its European presence outside of Germany and France. This being said, Akka had a net debt of EUR 223m as of H1 2017 and will need to keep on improving its profitability and FCF to fund its ambitions.
Bertrandt: no track record in M&As, but has funding for potential acquisitions
Bertrandt is a firm that almost exclusively has grown organically. With a net cash position that we estimate in the €100m-€150m range, Bertrandt clearly could start consolidate the market if it wanted to. We do not think however this is the priority of the firm, which remains improving its performance in the German automotive market, and resuming the 7%-10% organic growth it used to enjoy.
TCS: a rare acquirer, specialist of high organic growth, and with lots of money
TCS is a rare acquirer, with its last acquisition dating from 2013 with Alti, in the French financial services consulting market. TCS is at a broad level directing its investment in digital, and IoT could be a candidate for investment. And TCS has plenty of cash.
Having said that, TCS does not really need to make an acquisition: the company continues to grow very solidly organically, only topped by Cognizant. Unless the organic growth of TCS slows down, it will not make any M&A, in our view.
IAV: privately-owned and no acquisition track record
German privately-owned IAV is also a rare acquirer. As for AVL, its family ownership structure and its lack of a track record in M&As makes it unlikely to make any acquisition in the ER&D services space, let alone to make a mid-sized or large one.
EDAG: accelerating its tuck-in acquisitions strategy
EDAG since its flotation in 2016 has accelerated its acquisition activity, with two small acquisitions in 2017 (in the automotive sector, in the U.S. and in Sweden). We are expecting EDAG to continue on this path of small acquisitions. The net debt of the company (EUR 119m at end of Q3 2017) limits its propensity to buy a large competitor.
Bottom line: an accelerated consolidation, yes, but not necessarily through large acquisitions
Looking at the top ten ER&D vendors globally, we are finding appetite for small to mid-sized acquisitions, but not necessarily for large transactions. Of all vendors, ÅF and Akka would be more the most likely to make such a large acquisition, but are not financially in a position to do so.
TCS, and HCL Tech have ample funding to make a large acquisition but are facing two options:
- The acquisition of a mid-sized to large onshore vendor. Yet, such as a vendor would have a negative on TCS’ or HCL’s EBIT margin, are onshore have the third of the EBIT margin of TCS and HCL Tech
- The acquisition of a mid-sized offshore vendor. Such as an acquisition would be expensive, and likely candidates are quite rare.
So is the Aricent deal going to accelerate the consolidation in the ER&D services market? Potentially, but are finding few vendors within the ER&D industry likely to do so. Of course, the consolidation could come from vendors with a different background, especially, in the IT services: Accenture, Capgemini, Tech Mahindra are potential candidates.