SI Review: December 2013

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The Heat Continues: 2013 market retains its swagger

By Al De Bellas

The market for mergers & acquisitions continues its comeback. Despite the economic uncertainty arising from a dysfunctional government unwinding its own mountain of debt, increased regulation and slowing growth in international markets, there have been 70 announced transactions through Sept. 30. As a result, 2013 is on track to substantially exceed 2012.

Beyond the number of deals, there is another contrast between 2013 and each of the three preceding years. Each of those years boasted several transactions with values of more than $250 million. As of Sept. 30, however, there have been no deals announced in 2013 that exceeded $250 million in value.

The primary reason for this is buyers in those larger acquisitions were among the largest staffing companies, which have since been focusing on integrating those acquisitions and have not been active in M&A during this period.

Those strategic buyers included: Adecco, which acquired MPS Group; ManpowerGroup (acquired Comsys); On Assignment (acquired Apex); Randstad (acquired SFN Group); and Recruit (acquired Advantage). Recruit did, however, recently acquire a firm through its CSI Companies subsidiary.

Segment Activity

As one can see in Figure 1, information technology staffing continued to increase its share of activity with 20 transactions to date, representing 28.6 percent of all transactions, as compared with 20 for the entire 2012 year, representing 24.3 percent.

Substantially all analysts are predicting continued increases for IT. Buyers ask more about IT staffing than any other segment. Commercial staffing maintained its second position with 17 transactions to date, representing 24.3 percent of all activity, compared with 16 or 19.5 percent in 2012.

Click on chart below to enlarge.

Healthcare staffing was the third-most active segment. The Affordable Care Act is truly a double-edged sword. It has created a number of issues with which staffing companies must deal, but there appears to be a consensus that it will be a net benefit to the staffing industry, particularly healthcare and IT staffing.

The “other” category includes transactions in sectors that are not part of the prior three categories. It includes professional, technical, executive and retained search, PEO and outplacement.

Buyer Activity

Privately held strategic buyers have been the No. 1 buying group since 2008. To date in 2013, the buyers in about 75 percent of all transactions were members of this group. For the past five years, they have represented an average of about 60 percent of all buyers.

Click on chart below to enlarge.

Publicly held strategic buyers have occupied second place since 2008. In the last five years, “publics” were the buyers in about 33 percent of all transactions. In the first three quarters of 2013, their percentage is only about 20 percent. This is due, in part, to the reasons mentioned at the beginning of this article.

Private equity groups (also called sponsors) have a great deal of money to invest and are quite eager to do so. However, private equity groups are not for everyone. Their initial acquisition in a space has to be a “platform” acquisition. That is, one that has sufficient critical mass and defined infrastructure to serve as the vehicle to acquire and successfully integrate other companies.

The other type of acquisition the private equity groups support is called an “add on” or a “tuck in.” This type of acquisition is made by one of their portfolio companies, which makes this type of acquisition, essentially, an acquisition by a strategic buyer.

To date in 2013, private equity groups have accounted for just 5 percent of acquisitions. Their average for the last five years has been 7.5 percent.

Cross-Border Deals

It is interesting to note that, in 2012, five of the eight cross-border transactions were foreign companies acquiring U.S. domestic operations. In contrast, in the first three quarters of 2013, eight of the nine transactions have been U.S.-based companies acquiring foreign operations. This change is likely to have been caused in part by the difficult conditions in the Eurozone in this period.

Click on chart below to enlarge.

Valuation Factors

Staffing firms have the ability to substantially control many factors that affect their value to an acquirer, but there are other factors out of their control that affect the value. These include general economic conditions and the perceived outlook for the staffing industry.

One particular emerging paradigm shift to which staffing industry participants should pay particular attention: the emergence of the “human cloud” staffing category, which includes online staffing and crowdsourcing.

Unlike earlier technology entries like VMS and MSP, these new staffing alternatives have the potential to affect staffing providers, regardless of size and industry served. And although they presently accounting for a very small percentage of sales, their rapid adoption rate and aggressive pricing structure merit careful study going forward.

Company owners should pay close attention to these factors, particularly in determining the timing of their exit plan.

It’s All About Timing

Regardless of how good the M&A climate may look now, it can turn quickly — and for reasons unforeseen by anyone. The best time to sell is on the way up. The best time to acquire is on the way down — but this is not for the faint of heart.

Owners should execute on their business plan with a view to an ultimate exit, even if they do not plan to sell. However, once entering into the sales process, sellers should make decisions under the assumption that a sale will NOT take place.

The importance of timing cannot be overemphasized. Once the inflection point in a cycle is reached, no multiple will be high enough to offset the immediate perception of lower future earnings by buyers.

If an owner seeking to implement an exit strategy is confident of very high growth in the immediate future, the reward of waiting may outweigh the risk. But if an owner holds back their exit in anticipation of slightly above average growth, that owner could wind up not taking advantage of a good market and a tailwind, such as that which presently exists.

Al De Bellas is president of De Bellas & Co. adebellas@debellas.com

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Noteworthy Transactions in 2013 to Date:

  • Conversion Capital acquired Update Legal, one of the largest legal staffing firms in the nation, from Gryphon Investors. This was a private equity group to private equity group transaction.
  • Elwood Staffing acquired SOS Staffing Services, creating a combined entity with more than $750 million in revenue, making it one of the largest commercial staffing firms in the U.S.
  • Icon plc, based in the U.K., acquired Cross Country Healthcare’s clinical services division for $52 million in cash plus a $3.8 million earn out.
  • Medical Solutions acquired On Assignment’s OA Nurses division for $31 million in cash.
  • PAE Government Service acquired Computer Sciences Corp.’s. Applied Technology division for $175 million in cash.
  • TrueBlue acquired MDT Personnel for $48 million in cash.

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Staffing-Related Transactions

Staffing Industry Analysts began tracking in 2010 a group of transactions designated as staffing-related. This category includes vendor management systems/managed service providers, recruitment process outsourcing, software as a service, human resource outsourcing, online staffing, job boards, hospice services, software, various types of outsourcing as well as talent acquisition.

The common thread among most of these sectors is that they are applying new technology in a way that is widely expected to have a significant effect on the staffing industry as we know it today. This impact could be even more far reaching than VMS/MSP has been, because it affects the basic manner in which staffing is conducted.

Following are examples of staffing-related transactions since 2010 and the total number each year.

  • 2010 (five) — Monster acquired Yahoo Hot Jobs; Gentiva Health Services (Hospice Services) acquired Odyssey Healthcare; MedAssets (VMS/MSP) acquired Broadlane; and Madison Dearborn Partners acquired Fieldglass (VMS).
  • 2011 (12) — Automatic Data Processing Inc. acquired The Right Thing (RPO); Snow Phipps acquired ZeroChaos (Risk Mitigation); Insperity acquired the software line of OrgPlus; Oasis Outsourcing acquired Advantec; Taleo acquired Job Partners.
  • 2012 (29) — ZeroChaos acquired WorkforceLogic; IBM acquired Emptoris (VMS); Vista Equity Partners acquired Bullhorn; ADP acquired Ma Foi Consulting Solutions; Gores acquired Idea Integration (MSP/IT Solutions); Accel-KKR acquired Pinstripe (RPO); Recruit acquired Indeed (job aggregator); Bullhorn acquired Sendouts; IBM acquired Kenexa (HRO); Allegis acquired Gettinghired.com.
  • 2013 YTD (seven) — Provident NY Bancorp acquired Sterling Bancorp; CareerBuilder acquired Oil and Gas Job Search. 

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