By Craig Johnson
Mergers and acquisitions in the staffing industry are on the rise this year, but the act of buying or selling a staffing firm is no mean feat. Not only are there numerous moving parts to navigate, but emotions can run high in this process.
When sizing up firms, buyers look at potential for growth, quality of management, the people involved and the degree of overlap to existing operations, among other things. Sellers have their own take. Then there’s the art of bringing the two firms together. There is also a timing issue. The market for buyers is looking good, but things can change rapidly. Both sides have to work together harmoniously to make the deal. Then both companies have to be integrated after the deal takes place.
“People businesses are hard to acquire, and you really only get one chance to set the tone and establish the trust,” says Peter Dameris, president and CEO of On Assignment Inc.
“If you do those things right on the front end — and you target the right company to join forces with — it’s a manageable task,” Dameris says. “But it requires a lot of attention on overlap, people and whether the business has been around long enough to have institutionalized its go-to-market strategy.”
Dameris estimates he’s been involved in about 140 staffing M&A deals during his career. One recent large deal was On Assignment’s acquisition of information technology staffing firm Apex Systems Inc. for $610.8 million in May 2012.
What Makes a Firm Acquirable
When looking at a staffing firm, strategic buyers will look at the quality of the business as well as growth potential of the firm to be acquired as key considerations. They also look at the management — whether it will stay after the deal. People are also a concern; there’s a need to make sure the rank and file is on board.
There’s also the question of overlap. Do firms have offices in the same towns serving the same customers?
“You always want to make sure the business is solid, the business looks like it can grow and it has strong management that will stay with the business,” says Troy Gregory, CEO of System One, a Pittsburgh-based staffing provider. “I’m a big believer that the staffing business is only as good as the people who are in it. So you want to make sure the people are happy, they will stay.”
System One announced the acquisition of Joulé Inc. in September, giving the combined companies more than 6,000 employees and 40 offices throughout the country. In addition, MidOcean Partners, a New York-based private equity firm, made an equity investment made in System One in December 2012.
Joulé has strong management and its operations are complementary to System One, Gregory says. In fact, the two firms had no geographic overlap despite System One having 27 offices and Joulé having 22.
Joulé also had a large presence in New Jersey, near System One management.
“The fact that it was so close and it’s so easy to talk with management and be around the business made a lot of sense,” Gregory says.
On Assignment’s Dameris says he weighs service offering overlap and if the business model is complementary. Another consideration is whether the management team has put in place an institutionalized process to grow the company in a thoughtful way — the team has moved the company forward from an early stage entrepreneurial focus on just raw sales momentum.
“We buy business models, we don’t buy revenue, so Oxford Global [an IT staffing firm acquired in January 2007] was a platform for the high-end IT,” Dameris says. “Apex was an acquisition that was a business model for the middle market.”
Business overlap is a possible pitfall in an acquisition. If both staffing firms have offices in Atlanta and they both serve Coca-Cola Co., it’s unlikely everybody will be able to remain. And those who don’t may move to a competitor.
However, people are also a key consideration when acquiring a staffing firms.
“We’re in the people business in the staffing industry, and I like to say we have no patented products or proprietary technology; all we have are relationships with employees, candidates and customers,” Dameris says. “And it really does matter who fills those functions on a daily basis. Many times you have to buy a business twice, once from the owners, the second time from the employees.”
On Assignment spent weeks developing a communication plan for customers, consultants and internal staff when it acquired Apex, he says. The firm aims to be honest and clear about what an acquisition will mean for both parties involved.
The Growth Factor
A driver for many a sale or acquisition is growth.
That’s the case with Digital Intelligence Systems LLC (DISYS), which has been on the list of fastest-growing U.S. staffing firms for four years in a row. Founder and CEO Mahfuz Ahmed says the company is looking to grow further. Among the largest firms on Staffing Industry Analysts’ list of fastest-growing staffing firms, the company in 2012 sold a minority stake for $20 million to Weston Presidion, a private equity firm with offices in San Francisco and Boston.
“We bootstrapped the company and never took any loans, never took any private investment, to grow it from about zero dollars in revenue to about $330 million in global revenue,” Ahmed says. “Our goal in the next four to five years is to hit about a billion dollars in revenue, but really do it based on working with our clients, who are now more and more global and want global services delivery.”
Ahmed brought in private equity firm Weston Presidio as a partner to help fuel its growth.
That includes beefing up its solutions offerings to meet the needs of a growing number of customers who want to outsource projects. For example, some clients to which DISYS provides quality assurance IT staffing want an option to outsource those tasks altogether. DISYS might not have won such outsourced bids in the past, but now it can provide that service and keep that line of business.
The private equity deal also enables DISYS to consider acquisitions of its own where it makes sense. DISYS has bolstered its back-end operations to provide for growth, and hired a CFO and general counsel.
Ahmed cited three reasons for choosing Weston Presidio. One is that it’s a growth-oriented firm, he says. “Two, we looked at the funds they were investing from their beginning side of the cycle so they still have about four or five years before that money needs to be called in — and it does make a pretty big difference which part of the cycle you’re taking money from,” he says. “And three, although they didn’t have much exposure into the IT sector, they did have a lot of exposure into growing companies from a mid to large level.”
Ahmed also says he made the deal at a time when DISYS was in a good position. People will give you money when you need it, but the terms will be pretty bad, Ahmed says. Pursuing the funding at this time helped DISYS garner a better deal.
When Buying Is a Win-Win
In the Apex deal, Dameris says things got rolling after On Assignment completed a strategic plan in 2010 that called for it to grow to $1 billion in revenue. And to do so, it planned on an acquisition.
On Assignment was looking to serve the middle segment of the IT staffing market where bill rates average between $40 and $70 an hour. The company decided to make an acquisition rather than expand Oxford — which provides high-end IT skills with bill rates at about $132 an hour — into the mid-market. The decision took into account what Oxford’s brand represents, its margin and existing growth opportunities. In addition, the firm would still be relatively small compared to the largest players in that portion of the IT staffing market.
“If you really want to serve large customers, you have to have scale and size,” Dameris says. “So we looked for a company that would allow us to get into that space, and over a number of years we built up a relationship with Apex and were able to come together. So it now allowed us to address the vast majority of the IT staffing market, and we really didn’t have any sales channel conflict.”
Oxford focuses on skill sets, placing a few specialized workers at each customer. It does not work through a vendor management system. Apex handles large sales into customers and does work with VMS providers.
“The acquisition started not because, ‘hey, here’s a big segment of revenues,’” Dameris says. “We had set a plan out that we wanted to address a bigger portion of the IT staffing market. And we thought that we could address it because there wasn’t going to be any sales channel conflict or cultural conflict and that we could harmoniously coexist and share opportunities and leads with one another.”
The Joulé deal gives System One greater depth when it comes to service offerings, Gregory says. It also gives the company greater size, allowing it to compete against larger firms. However, because the company remains private, it still has the ability to make decisions quickly.
“It gives us much more presence geographically, it puts us into divisions that we really like,” Gregory says. For example, Joulé has a telecom division that is growing, and the deal puts System One higher on the map in its clinical/scientific business. Joulé also brings a business called Ideal, which staffs engineers for offshore oil and gas operations.
Gregory says he first heard about a possible Joulé deal from a banker.
A Standardized M&A Process
Gregory also has a lot of experience overall in staffing M&A as both a buyer and seller. System One itself was acquired in a management buyout from Hudson Global Inc. Gregory originally had a small business that was acquired by a company called Esquire. That company was then acquired by TMP Worldwide, part of Monster, in 2004. Hudson spun out from Monster, and then in 2008, management bought the business from Hudson, which became System One.
Private equity firm MidOcean acquired a stake in System One earlier this year.
However, Gregory says the M&A process for staffing firms is pretty much the same since he made his first deal in 1998, although technology enables the processes to move faster now.
It starts with finding a company, signing a nondisclosure agreement and looking at the firm’s book of business. That’s then followed by a letter of intent with a proposed price you feel is fair. The sellers can then accept or reject.
“If they accept it, then you get to dive in and do some due diligence,” Gregory says. “You hire an accounting firm, and you hire a legal firm. You try to finish the deal. It’s a lot of ups and downs, it’s highly emotional, but if it’s meant to be, it’s meant to be.”
Craig Johnson is managing editor, staffing publications, at Staffing Industry Analysts. firstname.lastname@example.org