Merger and acquisitions make a comeback
By Alan Bugler
2012 has been a busy year: amid the sluggish economic recovery, we have been through a bruising presidential election season, and have witnessed the surprising success of the reality TV show “Here Comes Honey Boo Boo,” the Queen’s Diamond Jubilee and the impressive U.S. Olympic team performance earlier in the year, just to name a few events. Meanwhile, the less widely media-glorified staffing industry has seen its own share of action this year: mergers and acquisitions activity has been surprisingly active. And if the present is the food of the future then conditions are ripe for a strong M&A market in 2013.
A trifecta of uncertainty surrounding the election, changes in tax codes and the impact of healthcare reform have left many business owners opportunistically looking to transact in the second half of 2012. Merger and acquisition activity in the staﬃng sector increased each quarter this year, reaching pre-recession levels in the third quarter. We have observed 100 transactions through Sept. 30, compared with 88 transactions for the same period in 2011.
Following large consolidation activity in 2010 through early 2012, the most active buyers in the staﬃng segment have largely been on the sidelines as they continue to digest their acquisitions. Adecco purchased MPS Group for $1.2 billion and ManpowerGroup acquired Comsys for $413 million in 2010; Randstad bought SFN Group for $770 million and Recruit acquired Staﬀmark for $295 million in 2011. MPS Group, Comsys and SFN Group (formerly Spherion) themselves were some of the most active acquirers of staﬃng businesses, completing dozens of deals in the last decade.
Recruit and On Assignment have been the few acquirers with mega deals in 2012. Recruit acquired Advantage for $410 million and On Assignment acquired APEX Systems for $600 million (a valuation of more than nine times trailing 12 months EBITDA). The legacy staﬃng companies have been too busy focusing on integrating these acquisitions to put much eﬀort into additional M&A.
Private equity ﬁrms have become increasingly interested and active in the staﬃng industry since 2010, due in part to several successful investment realizations. The capital raised by private equity ﬁrms from 2002 to 2008 was largely under- invested, leaving these ﬁrms with more than $500 billion in uninvested capital after the recession. In mid-to-late 2010, we noted a shift in private equity ﬁrms’ willingness to invest in platform companies, often outbidding many prospective strategic acquirers. This seemed to be a combination of private equity ﬁrms’ desire to put capital to work along with the reemergence of well-performing companies post- recession. The private equity community has favored larger transactions and has had a signiﬁcant interest in managed services oﬀerings. Recent notable private equity transactions, many of which traded at attractive multiples, include Zero- Chaos, Pinstripe, Fieldglass, EmployBridge, Comforce and Creative Circle.
Recently, however, private equity ﬁrms appear to be reaching capacity in terms of deal ﬂow. There is still significant capital on the sidelines, last estimated to be approximately $430 billion, but due to capacity constraints, private equity ﬁrms are becoming more selective on the deals in which they choose to participate. The main driver for this is a dramatic increase in opportunistic sellers — those exploring whether the “right” deal is attainable. Some private equity ﬁrms have said that deal ﬂow has increased four to ﬁve times when compared to just a month or two earlier. This increase in deal ﬂow has put a portion of the leverage back to the beneﬁt of the buyer; while not all of the increased deal ﬂow will relate to closed transactions, it should continue to fuel the upward trend. Those sellers seeking the pricing of recent mega deals need to be cautious.
Recently announced transactions, such as the recapitalization of Insight Global with Ares Management LLC and a $1.2 billion transaction with CHG Healthcare Services and Leonard Green & Partners L.P. and Ares, illustrates the continued interest in this industry for well-positioned and diﬀerentiated staﬃng businesses.
International staﬃng companies, in an eﬀort to diversify and gain access to the largest staﬃng economy, remain highly interested in the U.S. market, but the persistent European economic woes and lackluster stock market performance have limited their ability to invest in the U.S. staﬃng industry. In 2012, we recorded 26 acquisitions in the U.S. by foreign staﬃng companies, down from 34 through the third quarter of last year.
The information technology and professional services segment remains the most active on the M&A front in 2012, with 23 transactions as of Sept. 30. The commercial/light industrial (C/LI) and healthcare segments are virtually tied with 12 and 11 transactions, respectively. The “other” category, which includes managed service providers (MSPs) and vendor management system (VMS) providers, remains highly sought after by private equity ﬁrms and strategic buyers looking for technology-enabled oﬀerings with more predictable revenue streams.
Click on chart below to enlarge.
Valuation multiples vary depending on company proﬁle, speciﬁc ﬁnancial achievements and operational trends of the staﬃng company in question. Companies with diversity or minority status continue to receive additional valuation scrutiny.
Characteristics that aﬀect valuations include:
- Scale and size
- Revenue growth trend
- Gross margin proﬁle
- Recurring revenue stream
- Diversiﬁed client base
- Quality management team
- Clear and articulate growth strategy
Click on chart below to enlarge.
A number of factors less intrinsic to a speciﬁc business also inﬂuence valuation and can cause a shift or expansion/ contraction of the Framework. These include:
- The subsector within staﬃng
- The overall health of the economy
- The state of the staﬃng economic cycle
The state of the staﬃng economic cycle — warrants further explanation as it is frequently a topic of conversation between our team and both buyers and sellers. The beginning of the typical staﬃng cycle (see chart below) is characterized by increased temporary placements that are needed to meet the increasing demand for goods and services as the economy picks up. Once corporations become more conﬁdent that the increase in economic activity is not a “false start,” companies turn to search ﬁrms or look to convert some of their temporary workforce to permanent positions. In a typical cycle, commercial/light industrial staﬃng usually leads the staﬃng cycle upturn, followed by professional staﬃng and permanent placement, which is last to peak. After a number of years of strong growth, the cycle matures and typically sees declines as the economy begins to slow and ﬁrms reduce their temporary workforce.
All signs would indicate that we are currently near the mid-point of a typical recovery cycle. With future growth expectations and some analysts and staﬃng industry insiders expecting to see temporary penetration rates eventually surpass 2 percent, we believe that the current cycle is more elongated than usual. Without any major domestic or global hiccups, we would expect to see several good years of growth ahead of us.
As we hover around the mid-point of the cycle, many clients and experts within the industry are beginning to update their strategic plans. For those thinking of a sale or recapitalization, it has been our observation that the tendency of many sellers is to delay initiating the sales process to allow EBITDA to grow in hopes of realizing a higher sales price (delaying until closer to point C than point B). However, as the cycle matures, buyers sense that maturity and begin to oﬀer lower EBITDA sales multiples. The result is that sellers do not receive an increased price for their business.
Click on chart below to enlarge.
Numerically, this phenomenon can be illustrated as:
|Closer to Point B||Closer to Point C|
|Lower EBITDA x Higher Multiple - Higher EBITDA x Lower Multiple|
An elongated cycle would normally provide sellers with an opportunity to delay a sale in hopes of increasing EBITDA and receiving the same multiple for their business. However, we have recently observed that the uncertainty of the economy and the presidential election have resulted in more conservative oﬀers from both strategic and ﬁnancial sponsors.
The Road Ahead
So what does this all mean for activity next year? 2013 promises to be a busy time. We expect staﬃng industry M&A to be similar in overall volume as in 2012, but with a shift in skill set mix. Healthcare staﬃng has lagged other sectors this year and we see pent-up demand that will materialize in new opportunities in 2013. The legacy staﬃng companies that have completed large integration projects over the last two years will reemerge as buyers. However, they will be picky and looking for diﬀerentiated assets. Private equity ﬁrms will continue to invest in the sector provided debt remains avail- able. I also predict “Here Comes Honey Boo Boo” will do well for one more year.
Alan Bugler is a vice president at CHILDS Advisory Partners, where he focuses on sourcing and executing mergers, acquisitions and capital raises for business and technology services companies. He can be reached at (404) 751-3004 or email@example.com.