Merger and acquisition activity among North American staffing firms reached a ten-year high in 2018, with 112 publicly announced transactions, as noted in Staffing Industry Analysts’ annual report on staffing M&A. If we included transactions not publicly announced (typically smaller transactions), the number of total deals completed last year would likely be in the several hundreds. Matching the overall trend, the number of publicly announced staffing firm acquisitions that had a focus on commercial staffing (that is, industrial and/or office/clerical staffing) rose from 16 acquired firms in 2017 to 22 firms in 2018.
So what might be driving this record level of M&A activity? The most obvious factor was a banner year for the US economy, which saw GDP growth of roughly 3%, in part due to the stimulus of the Tax Cuts and Jobs Act. Secondly, although the Fed hiked interest rates to 2.5% by the end of the year, funding for M&A generally remained accessible. Thirdly, with no immediate signs of a recession, the perception exists that there may still be runway for acquired firms to execute on growth strategies without macroeconomic disruptions. Indeed, median price/EBITDA multiples appear to be on the high end of their cyclical range according to our most recent Staffing Company Survey report on this topic. Fourthly, staffing firms may be looking to grow larger to achieve economies of scale, as we discuss later in this article. A final factor is that with the market for temporary staffing at record size (for example, $34.9 billion for industrial staffing last year) the opportunity appears attractive for staffing firms to succeed in tapping new markets and to take market share with existing customers by executing on competitive advantages.
It is noteworthy that the market share held by the largest industrial staffing firms has increased during this last economic expansion, fueled by above-average rates of organic growth and due to merger and acquisition activity involving these large firms. See the accompanying graph from our report on the largest industrial staffing firms in the US. This trend of market consolidation appears more evident in the industrial staffing segment than it does in the other segments of the staffing industry, and may in part be driven by the pursuit of economies of scale. As staffing firms grow larger, they can achieve better pricing power with their suppliers; spread their workers’ compensation risk over a wider pool of workers; and spread operating expenses related to executive compensation, talent acquisition technology, marketing, and facilities across a greater number of staffing placements.
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Combined market share of the 5 largest and 15 largest US industrial staffing firms, 2008 to 2017
Looking ahead to 2019 and beyond, the US economy continues to grow and the outlook for interest rates appears stable, an environment conducive to more M&A activity. And as the need for digital transformation continues to be felt by industrial staffing firms, as it is in many other industries, additional motivation exists to acquire new technologies and staffing operating models, or to achieve greater scale to better afford such technologies. The stage appears set for more deals.
