The acquisition arms race

Deloitte’s acquisition of Monitor (see my previous post) may have unintended consequences, a bit like that apocryphal butterfly which, flapping its delicate wings on one side of the world, triggers a hurricane on the other.

Deloitte may be being unusually quiet about the move, but it’s provoked widespread discussion right across the consulting industry.  Why?

Part of the reason, I suspect, is that it’s touched a nerve.  The Big Four have made many acquisitions over the last 2-3 years, some larger and higher profile than this one, but most were either niche firms or ones which expanded the firms’ core areas of expertise rather than taking them into a new space.  Monitor, by contrast, is seen (at least by its competitors) as being one of a select group of top strategy firms, so it feels a little as though this is different.  The Big Four, having been camped on the windswept plains around Fortress Strategy for the last ten years, have finally managed to breach its walls. Will the acquisition of Monitor simply be the hole through which the Big Four now pour?

If we’re looking for military analogies, perhaps a better one would be the arms race.  Given the cost and upheaval involved in acquiring a professional services firm, there’s little to be gained by simply replicating Deloitte’s move.  Even if the world were populated by Monitor lookalikes and you could buy not one but several, that wouldn’t be enough to create an advantage.  Instead, the ambitious firm would have to go for something bigger – which of course means that the acquisition after that has to be larger again.  Suddenly we’ve gone from relatively pragmatic and opportunistic M&A strategies into something that’s akin to the Bay of Pigs.

Ironically, it’s just a short hop from this point to the consulting equivalent of Mutually Assured Destruction.  MAD posited that, because the various protagonists in the Cold War knew that, if any of them fired their nuclear missiles, the others would have no choice but to retaliate, destroying the entire world in the process, none of them would actually start a war.  The result was a stalemate which persisted until something radical changed (in this case, the fall of communism).  An acquisition arms race in consulting would have a similar effect, rapidly taking firms to a point where the next deal was so big it would destabilise the entire industry.

I think one of three things will happen.  Either one firm will try play a trump card (or fire a missile, to stick with the analogy), acquiring a firm which is so big and so well-known that it will dwarf any other potential deal, or we reach a point of MAD-like paralysis in which no firm dares make a move because of the reaction it might trigger (the advantage of buying a mid-sized strategy player would be completely lost if that pushed another firm into doing something bigger, if also more reckless).  Alternatively – and this is what I’d place my money on – the consulting industry’s equivalent of the Berlin Wall comes down, creating the space for a completely new entrant, one which reshapes the structure of the market.

Not so much the end of history, but the end of consulting-as-we-know-it perhaps.