M&A INTERNATIONAL INC. Human Resource Services: A Sector Well Placed for Increased M&A Activity.

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1 M&A INTERNATIONAL INC. Human Resource Services: A Sector Well Placed for Increased M&A Activity

2 Table of Contents 1. Executive Summary... 3 Review of M&A Activity (2010 Q1 2013)... 3 Looking Ahead Overview... 5 HR Services Trends and Leading Macro-Economic Factors... 7 Drivers of M&A Activity M&A Overview & Analysis... 9 Analysis by Deal Value and Volume... 9 Deal Analysis by Type of Targets Regional Deal Analysis by Value and Volume M&A Targets: Private vs. Public Companies M&A Deal Makers Most Active Buyers by Industry Type What Are Buyers Buying? Forward Looking Themes The Mining Boom, a Bane for the Australian HR Services Industry Private Equity Groups (PEGs) Are Here to Stay Middle Market Seeking Attention Regulations Framing HR Services Demand Story HR Services Companies Continue Going the Outsourcing Way Internationalization of Asian HR Services Firms Conclusion About M&A International Inc Main M&A International Inc. Business Support Services Specialists Representative Transactions Transactions Closed by Members of M&A International Inc Major M&A Transactions Mentioned in this Report

3 Executive Summary 1 Review of M&A Activity (2010 Q1 2013) The stabilizing global economy, improving employment market conditions and increasing demand for temporary staffing have led to a substantial increase in mergers and acquisitions (M&A) in the global Human Resource (HR) services industry. Post , the improving performance of companies in the industry has resulted in a reasonable level of average valuation multiples, making the HR services market attractive for acquisitions and divestments. In the near term, this trend is likely to continue, leading to a strengthening of EBITDA multiples and valuations across the HR services industry, thus making the future market appealing for M&A. The HR services sector has a clear correlation with changes in GDP and the unemployment rate, with temporary unemployment being the leading indicator. The HR services sector tends to perform well when annual GDP growth is strong and/or the unemployment rate is declining. The industry coincides with the economic cycles of the country. The beginning of a cycle, i.e. when the economy recovers, is characterized by increased temporary employment, which is needed to meet the increasing demand for goods and services. As corporations become confident of economic recovery, preference for a permanent workforce increases, while as the cycle matures and the economy slows down, firms reduce their temporary workforce. The global economy is currently at the mid-point of the recovery cycle, which explains the current rise in demand for temporary employment and increased M&A activity to acquire temporary staffing firms. Between 2010 and Q1 2013, the HR services industry recorded 387 M&A deals worth $6.1bn. After a modest post-recession revival during 2010 and 2011, the peak of this activity (based on M&A deal volume) was seen in 2012, with volumes reaching an alltime high as recovery of the global economy became eminent. Also valuations reached their maximum levels in 2012, with the median EBITDA multiple rising to 9.8 times from 7.0 times in Most of these deals have been relatively small in size, with the median revenue of targets at $27.2mn, and the median transaction value at $4.1mn. Since early 2011 employment conditions have been improving globally, resulting in an increased demand for HR services. From 2010 to Q1 2013, North America led in terms of overall M&A activity, accounting for a total deal value of $2.8bn, followed by Asia Pacific ($1.8bn) and Europe ($1.4bn). Furthermore, firms catering to general staffing accounted for the largest share of M&A activity (54.7%), followed by professional/ specialist staffing firms (31.2%) and executive search firms (14.2%). Over 2010 Q1 2013, the demand for professionals with a specific skill set and qualification significantly increased. The share of professional/specialist staffing firms (as targets) in total M&A activity increased from 28.4% in 2010 to 33.8% in The demand for such professionals came primarily from sectors such as information technology (IT), oil & gas, and healthcare. The acquisition of professional/specialist staffing firms was most prominent in the mature markets of the US and Europe where IT and healthcare staff are the most in demand, although a lack of skills persists. HR services firms have acquired an increased importance based on the need to reduce this gap in demand and supply. In Europe, particularly, it has become very difficult to find the right talent, especially across the IT and engineering sector. According to the European Commission, there will be between 300,000 and 800,000 IT-related vacancies across Europe by Apart from the role of HR firms in reducing the skill gap, other important factors that drove M&A activity include the need to grow in professional/specialist staffing (as seen in the acquisition of TMC Group by Gilde Buy Out Partners), diversification of product offerings (the acquisition of Allgeier SE by Oxygen Consultancy and ProfiPower by Randstad Hungary), and geographic expansion (the acquisition of REACH HR by ManpowerGroup and Right4staff Holdings by Gi Group). 3

4 Executive Summary 1 The role of private equity group (PEG) players who were reasonably active buyers in the HR services M&A landscape during 2010 Q is also vital. These players reaped good profit on their investments. Therefore, they are likely to increase their acquisition activities in the next three to five years. Looking Ahead Positive Outlook Furthermore, large and small HR services firms are expected to follow the M&A route to diversify their service offerings. Firms focused on delivering specialized services rather than traditional HR services will continue to grow their market share. The evolving set of HR services and HR servicing models such as social media recruitment, research process outsourcing (RPO) and managed service providers will shape the HR services industry in the future. Finally, the growing demand for professional/specialist and temporary staffing will continue to provide impetus for the acquisition of companies offering this service. The prevalence of temporary staffing is still at low levels. This is set to increase as companies operating in an uncertain postrecession environment favor a temporary workforce over permanent staffing. In addition, professional/specialist staffing, being a high margin business, is gaining an increasing share of services offered by HR services firms. In the HR services space, the boost in demand for temporary and professional/ specialist staffing has influenced M&A activity and is expected to increase further. Amid the recovering global economy, the near-term outlook for M&A activity in the HR services sector is positive. Cross-border buying will continue to rise as HR services firms continue to seek a greater geographical reach to cater to their increasingly global client base. As PEGs complete their investment cycles, a significant comeback from these set of buyers for more acquisitions is expected in the next 3 5 years. Jonas P. Knudsen Head of M&A International Inc. s BSS Group 4

5 Overview 2 The global Human Resources (HR) services 1 industry grew at a compound annual growth rate (CAGR) of 3.4% during to nearly $386bn. On the basis of our analysis and, as largely defined by leading HR services firms, the HR services industry is broadly structured under three key segments: 1. General staffing: predominantly involves placement services for lower wage, lessskilled workers with secondary education or equivalent. It is the largest segment of HR services and includes employment of workers in manufacturing units, construction sites, etc. 2. Professional/specialist staffing: includes recruitment, staffing and placement services for higher educated people in middle and senior management positions such as supervisors, managers, professionals, teachers and consultants. These professionals/specialists have vocational, university or higher education qualifications or possess a specialized skill set. 3. Executive search: comprises staffing and placement services for senior level executives such as directors and CEOs. Of these, general staffing is the most lucrative segment of the industry, accounting for a market share of approximately 70% with a value of $264bn in Geographically, North America is the most preeminent region in the HR services market, followed by Japan and the United Kingdom (UK) & Ireland. The HR services industry is highly fragmented with the top three players, i.e. Adecco, Randstad and Manpower, accounting for just an 18% share, while, in 2012, the top 10 companies contributed a 25% share to total industry revenues. Most companies in the industry are active in a few service segments. The biggest three global players, $bn Figure 1: HR services market by service segments, $278.5 $257.5 $ $92.9 $11.4 $ $10.6 $12.5 $ General staffing Professional/specialist staffing Executive search Note: Average exchange rate of /$: (FY2010), Source: Randstad and Adecco Annual Report, (FY2011) and (FY2012). Evalueserve Analysis Figure 2: HR services industry break-up by geography and players, 2012 General Staffing Professional/ 92.9 Regional break-up Specialist 15% Staffing Executive Search % 12.9 North America Japan 12% UK & Ireland France Germany & Austria 6% Rest of Europe Other 7% 17% 11% Market share 7% 6% % Adecco 11 7 Randstad 6 1 Manpower Others 82% Source: Randstad and Adecco Annual Report, Evalueserve Analysis 1 The global HR services market primarily includes the three core sub-segments: general staffing, professional/specialist staffing and executive search. It also includes other services such as outplacement services, recruitment process outsourcing, managed service providers, etc. However, such other services constitute a relatively small segment of this market, and are not the focus of our analysis

6 Overview 2 for example, are largely focused on general staffing services, which accounts for 60 to 75% of their revenue. In addition to global players operating in focused segments, smaller, mid-size and regional players provide services spread across the entire spectrum of the HR services industry. Furthermore, companies catering to a particular service segment also operate in the HR services industry. Examples include Robert Half International Inc., a US-based HR services company that specializes in executive recruiting, or firms catering to a particular geography, such as Temp Holdings Co. that offers HR services in Japan. Players in the HR services industry largely operate in a low margin environment. As seen in the table below, during 2012, key players largely operated at a gross profit margin of 16 to 18%. The temporary staffing industry is highly competitive and has low entry barriers, resulting in lower margins. With the prevailing uncertain economic conditions in which companies remain cautious of investment in fixed employment, the demand for temporary staffing has further increased. Adecco, the largest HR services provider, continues to rely on temporary staffing, which accounts for nearly 91% of its revenue. According to Staffing Industry Analysts (SIA), in the US, temporary staffing grew 13% and 7% in 2011 and 2012, respectively, and is expected to grow 6% in 2013 to $106bn. Similarly, the European region largely relied on temporary staffing during the tough economic times. According to Eurostat, the average share of temporary hiring in the EU27 has been almost 60% during The temporary staffing industry largely follows the headwinds of business activity and is a leading indicator of global economic activity. Table 1: Landscape of the global HR services industry (2012, in $bn) Key players Revenue Gross profit margin Adecco S.A. $ % Randstad Holding NV $ % Manpower Inc. $ % Kelly Services Inc. $ % Business description A Switzerland-based staffing firm that provides general staffing services to office and industrial sectors, along with professional/specialist staffing services to sectors such as information technology (IT), finance, legal and medical A Netherlands-based firm and the world s second-largest provider of HR services, offering general staffing services, placement of professionals, on-site workforce management and other HR solutions, such as payroll and outplacement services A US-based HR services company that provides services such as workforce solutions, professional/ specialist staffing as well as placement, temporary and permanent recruitment and staffing, assessment, training and development, and career management A US-based staffing firm that provides commercial, technical, professional/specialist staffing as well as outsourcing and consulting services Geographic presence North America, Western Europe, the Nordics, Japan, Australia, New Zealand and emerging markets North America, the UK, France, the Netherlands, Germany, Belgium, Luxembourg, Iberia and other European countries The Americas, Northern Europe, Southern Europe, France, Italy, Asia and the Middle East The Americas, Europe, Asia Pacific, the Middle East and Africa Note: The geographic presence is in no specific order of operations/scale. Source: Company websites, Evalueserve Analysis 6

7 2 HUMAN RESOURCE SERVICES 2013 Overview HR Services Trends and Leading Macro-Economic Factors The HR services industry is cyclical in nature and is also indicative of a country s economic cycles. Even more symbolic are the trends in temporary and contract staffing employment, which emulate the ripples of the economy. A brief analysis of the past two recessionary cycles in the US, Mar 01 Nov 01 and Dec 07 Jun 09, indicate that a directional change in temporary staffing led the changes in non-farm employment 2 and GDP by a couple of months. As shown in Figure 3, at Stage I, temporary employment had already started declining, representing the onset of the recession. However, non-farm employment and real GDP continued to rise. It was only at Stage II that non-farm employment, real GDP and employment showed a downward trend. At this stage, temporary employment had already registered a steep decline, depicting the deepening crisis. Similarly, at Stage III (Jun 09 Mar 10), while temporary employment had already registered its first post-recession upsurge, non-farm employment and the US employment rate continued to deteriorate, showing improvement only after Mar 10. At Stage III, GDP grew along with temporary employment, unlike previous stages where the lag relationship between these two factors was clearly evident. Another important factor is the unemployment rate, which is a strong indicator of trends in the HR services industry. As depicted in Figure 4, unemployment rates in the US declined during the past six quarters (Oct 11 Mar 13). In the US, it declined from 8.9% in Oct 11 to 7.6% in Mar 13, while in Japan it dropped from 4.5% to 4.3%, representing strong hiring levels and explaining the growth in their HR services markets. During the same period (Oct 11 Mar 13), unemployment increased in the Eurozone, Figure 3: US temporary employment, non-farm employment and GDP Indexed 100= June Jun-00 Mar-01 Dec-01 Sep-02 Jun-03 Mar-04 Temporary help services US real GDP Temporary Nonfarm!"#$%&'#()* 29/03/2013 help 99, services employmen 102, , Figure 4: Unemployment rates (%) in major countries/geographies t reflecting the economic slowdown in the region. However, a reversal is soon expected and employment is set to increase. Dec-04 Sep-05 Note: Shaded area represents the recessionary period Jun-06 Mar-07 European Union (27 countries) United States Japan Stage I Stage II Stage III Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13 Non-farm employment US unemployment rate (%) percent Temporary Nonfarm!"#$%&'#()* Jan-00 help 9,0 services employmen 4,0 4,7 t Source: Evalueserve Analysis, Euromonitor Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Source: Evalueserve Analysis, Eurostat Non-farm employment denotes employment for goods production, construction and manufacturing companies in the US. It does not include farm workers, private household employees, non-profit organization employees or government employees. 7

8 Overview 2 Flexibility Key Demand in the economy is returning, slowly but surely. Highly skilled jobs like engineering and IT are still big growth areas, and employers intend to continue to increase their use of flexible staffing in the months ahead. Kevin Green CEO Recruitment and Employment Confederation of the UK The industry has recently started to witness growth due to a higher level of temporary hiring, which is playing a key role in reducing unemployment in the US and, to a certain extent, in the Eurozone. Furthermore, improving economic conditions in the US and important legislation such as the Agency Work Directive 2008, favoring the HR services industry and due to be implemented in Europe in 2013, has started to build confidence among the hirers and, eventually, in the economy as a whole. In addition, according to Staffing Industry Analysts (SIA), the revenue of the US HR services industry is expected to increase 6% annually to $139.4bn in Amid these positive sentiments, the industry looks poised for consolidation. Furthermore, given that the clients of HR firms have global operations, they now prefer to outsource their HR processes to HR companies with a global presence. To better serve these clients, it has become necessary for HR services firms to expand their service offerings and operate on a global scale, primarily through M&A. Further discussions in the report manifest the rising consolidation activity in the global HR services industry. The following drivers of M&A activity clearly show the positive outlook for the industry. Drivers of M&A Activity M&A activity in the HR services industry is currently driven by a mixed bag of optimism and caution. While deal volumes are gradually increasing, buyers remain selective about which businesses to acquire and use their balance cash carefully. Vendors too are busy shaping up their business in anticipation of the right exit valuation and the most favorable timing. However, both buyers and targets foresee some proposition in the current market situation, which is guiding them towards acquiring/selling businesses. Some of these prominent market-making trends are as follows: 1. Expansion into multiple locations and attractive geographic markets With businesses going global and multinationals having offices worldwide, their preference for appointing a global HR services provider has increased. To fulfill this requisite from clients, HR services firms are now compelled to acquire companies with either a global reach or a strong presence in a region where the acquiror desires expansion. Internationalization has been one of the primary drivers of M&A transactions in the HR services industry. 2. Strategy to have umbrella service offerings Service diversification is one of buyers strategic rationales when looking for acquisitions. In order to strengthen their service value-chain through processes and offerings such as recruitment process outsourcing, workforce management solutions or professional/specialist staffing, HR services buyers resort to acquisitions. Such deals usually had relatively high multiples. 3. Target companies demands for a larger platform to fuel further growth HR services firms facing the woes of recessionary cycles have shown a preference for acquisition by larger HR services companies with deeper pockets in order to continue the growth momentum of their business. These are usually small firms which are in need of either more funds or stronger management to drive their growth. Such deals have usually represented low valuation multiples and have often involved little or no cash-out to vendors. 4. Consistent activity by private equity players creating an engaging M&A market The rising interest of private equity players in the HR services M&A market has bolstered overall consolidation in the HR services industry. The right timing of their investments has helped them realize good returns lately. The profitable investments have further fuelled their interest in the sector. 5. Growing need for temporary staffing As the global economy recovers from recession, businesses have laid a great emphasis on the use of a contingent workforce to maintain flexibility and efficiency. With the wide use of temporary/ contingent workers, many professionals and skilled workers have also become contingent workers. This has obligated HR services companies to expand into the temporary staffing landscape, primarily through acquisition. 8

9 M&A Overview & Analysis 3 The HR services M&A landscape has witnessed a steady increase in deal activity over the past three years. The following are the key highlights between 2010 and Q1 2013: Smaller deals have been common. During 2010 Q1 2013, the median revenue of targets was $27.2mn, while the median transaction value was $4.1mn. Management buy-outs also caught investors attention as both sponsored and non-sponsored buy-outs were executed. Most strategic deals represented geographic expansion or sector diversification. Companies with a clear sector focus, scale and geographic reach continue to be the most sought-after targets. The geographic deal spread saw a keen interest for European targets. At the same time, European buyers aggressively made the highest number of acquisitions, making this market the most active. No. of deals $bn Figure 5: Deals by volume and value, Q Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q $ $ $0.8 $ $0.4 $0.4 $0.4 $0.4 $ $0.2 $0.1 $0.0 $0.0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q $1.3 $1.5 $2.4 $0.9 Source: Evalueserve Analysis The dominance of private companies as buyers was experienced globally, as against conventional large, publicly listed companies. In fact, some large public companies were acquired and eventually made private. Strategic buyers accounted for an 86.4% share of the overall deal activity, while financial buyers representing private equity and other financial firms in the sector contributed the remaining 13.6% share. Analysis by Deal Value and Volume The attractive M&A environment in the HR services sector has caught the attention of investors, with a large number of active buyers and sellers over the past three years. Since 2010, 299 buyers have announced 387 deals in the sector, including 34 transactions announced in the first three months of Certain acquisitions demonstrated a fair degree of consolidation in the HR services sector larger firms seeking to grow through acquisition of smaller niche firms. For instance, VIP Staffing Inc. acquired Employer Flexible HR Inc. to double its presence in Houston and broaden its niche in HR services for the oil & gas industry. Management buy-outs were also prevalent among the announced deals between 2010 and the first three months of Both sponsored and non-sponsored buy-outs were executed by the management to gain ownership and/or operational control over the company. These included buy-outs of Kavaliro Staffing Services in 2010, Genesis Associates (UK) Ltd. in 2011, Neuven Solutions Limited in 2012 and SF Group in 2012, to name a few. During the first quarter of 2013, the HR services sector recorded 34 deals worth $0.9bn ($876.8mn), as shown in Figure 5. It was up from 26 deals worth $0.1bn ($109.2mn) in the first quarter of 2010, but below the same quarter 2012 performance, with deal volumes and values reaching an all-time high in the past three years. The median deal value 3 increased from $0.8mn in the first quarter of 2010 to $76.4mn in the first quarter of Represents deals with disclosed deal value 9

10 M&A Overview & Analysis 3 The median valuation multiple of total deals 4 was around 0.35 times LTM revenue. Of the deals falling above the median multiple, some of them reported high profitability margins. Intelligence, Ltd., operating at a gross margin of 52.2%, was acquired by Temp Holdings for $723.2mn in 2013 (multiple of 0.97 times LTM revenue). Various Drivers 100% 80% 60% Figure 6: Deal volume by type of HR services, 2010 Q % 53.0% 52.9%% 55.9% General staffing Professional/specialist staffing 40% Executive search 28.4% 33.0% 33.8% 29.4% 20% 14.7% 13.9% 13.2% 14.7% 0% Q Source: Evalueserve Analysis Over recent years, the rise in deal activity in the HR services sector can be attributed to various factors. Service providers have been evolving from being small, local companies to become more diversified, global businesses. At 2010 the same time, labor-market deregulation has promoted harmonized 2011 industry standards around the globe. Lastly, in the post-recession era, overall 2012de- mand for a flexible workforce has also increased Peter Gray BSS Specialist M&A International Inc. United Kingdom Deal Analysis by Type of Targets Between 2010 and Q1 2013, companies offering general staffing services have been the most sought-after acquisition targets within the HR services industry, accounting for nearly 55.3% of all transactions. Professional/specialist staffing, which is the fastest growing HR services segment, accounted Others However, the professional/specialist segment that comprises high-skill, high-wage jobs offers significant opportunities. In this segment, Electricity T&D Electricity for nearly 31.7% of the overall M&A M&A activity grew from 29 deals in 2010 to Generation transactions during the period. Growing at a 46 deals in In Q1 2013, the segment constant pace were also the activities in the witnessed 10 transactions, accounting for a executive search segment, with deals taking place in 2012, up from 15 in In the general staffing segment, the number of deals increased from 58 deals in 2010 to 72 in With 19 transactions, its share (55.8%) in Q also remained strong. Traditional clerical and light industrial staffing, which this segment largely caters to, has been in decline owing to outsourcing and advancement in technology. To tackle this falling demand, firms in this segment are finding it appropriate to either restructure or consider mergers and strategic acquisitions. 29.4% share 33.8 of the deal activity. 52.9Apart from the inherent demand for professionals, this sector is 29.4 benefiting from the 55.9 recent increase in demand for temporary staffing. HR services buyers are looking forward to increasing their service mix through the addition of this differentiated, high margin business. With professional/specialist staffing gaining traction, M&A activity is expected to remain strong in the future. In fact, the US Bureau of Labor Statistics projects a shortage of 1.2 million workers with bachelor s degrees or higher by This implies the growing demand for professional/ specialist staffing firms, making this segment increasingly lucrative for M&A activity in the near term Represents deals with disclosed valuation multiples 10

11 M&A Overview & Analysis 3 Further analysis of the transactions in this segment shows that recruitment companies catering to professional/specialist staffing within the financial services industry, comprising banking, insurance and wealth management services, have been the most viable targets. From the acquisition of only one HR services firm in 2010, seven such firms were acquired in Regionally, with five announced transactions, the UK topped the list for financial HR services firms in In Q1 2013, three such firms have already been acquired. Recently, healthcare HR services firms have also become attractive acquisition targets; eight such firms were acquired in 2012, from three in The professional/specialist staffing segment offers the strongest potential in the HR services M&A landscape. Among all three service segments, EBITDA multiples have been strongest in the professional/specialist staffing segment. Between 2010 and Q1 2013, professional/specialist staffing firms received the highest median multiple of 9.1 times LTM EBITDA, compared with 8.4 times in the general staffing services segment and 5.5 times in the executive search segment. Furthermore, the LTM EBITDA multiple has seen an increasing trend over the past three years, growing at an annual average rate of 30% over This implies that there is continued strong interest from buyers in this segment. Furthermore, the demand for companies offering HR services across varied sectors has also been consistent. At the same time, there has been a rising interest for HR services firms catering to the IT sector. From six deals to acquire IT serving HR services firms in 2011, accounting for nearly 5.2% of total deals, the number of such deals increased to 10 in 2012, representing nearly 7.4% of total deals in Figure 7: Comparison of deal multiples in service segments, 2010 Q General staffing EV ($ million) LTM revenue LTM EBITDA Mean x 9.68x Median x 8.39x Professional/specialist staffing Average Deal Value 7.0x EV ($ million) LTM revenue LTM EBITDA Mean x 9.79x Median x 9.14x Executive search EV ($ million) LTM revenue LTM EBITDA Mean x 6.86x Median x 5.50x 9.1x 11.9x Source: Evalueserve Analysis Figure 8: LTM EBITDA multiple for the professional/specialist staffing segment, Note: Deals announced in Q had no valuation multiples disclosed. Source: Evalueserve Analysis 11

12 M&A Overview & Analysis 3 IT is perceived as one of the faster growing areas of the HR services industry. According to SIA, during , the employment rate in the IT sector in the US rose 30% compared with only an 0.8% increase in total employment. Owing to this growth, IT staffing grew 15% to $20.6bn in 2011 and 12% in It is expected to grow to $25bn (8%) in IT Influence Figure 9: Deal volume by industry served by target, % 6% 36% 11% Diversified Finance Healthcare Industrial, Engineering & Construction 20% IT Services 10% 9% Others Note: Based on 94 deals for which target information was available. Source: Evalueserve Analysis The enormous boom in the use of computers has been the principal driver for increasing staffing demand for programmers and technicians during the past decade. Also, with the US health system going fully electronic under The US Recovery Act of 2009, the demand for IT professionals with clinical experience has given a boost to IT staffing. Bradford A. Adams BSS and Technology Specialist M&A International Inc. United States The rising demand for IT professionals can the primary reason for an uptick in the IEC be gauged by the 36,2 acquisitions made 9,6 by the big three HR services firms (Adecco, Randstad staffing 8,5 sector in the 20,2 recent past. 10,6 6, and Manpower). During the last couple of years, each of these firms has acquired a large US-based IT HR services firm, thus scaling up their exposure to the IT sector, particularly in the US. In the future, the contribution from both the IT and IEC sectors to the HR services industry, specifically temporary staffing, is expected to continue. According to SIA estimates, the share of IT and industrial staffing will increase to nearly 60% in the The industrial, engineering and construction (IEC) sector, which largely supports US temporary staffing market in 2018, from 53% in basic industries driving an economy, has been one of the most dominant sectors in the HR services M&A landscape. From only four transactions in this sector in 2011, 19 HR services firms catering to this sector were acquired in 2012, accounting for nearly 20% of total HR services M&A deals. As the world economies continue to recover, there is a strong reliance on basic industries such as manufacturing and construction to fuel this revival. This has been 12

13 M&A Overview & Analysis 3 Regional Deal Analysis by Value and Volume Figure 10: Regional deals by volume and value by target s origin, 2010 Q By target s origin, Europe dominated sector activity by attracting a major chunk of deals (about 56%) over the years, and reporting 216 transactions between 2010 and Q1 2013, as shown in Figure 10. The number of deals jumped from 56 in 2010 to 77 in 2012, representing a 37.5% rise. In addition, Europe is also the largest regional HR services market, accounting for more than a one-third share in the global HR services market by 2012 revenues. 27% 14% 3% Deal volume 56% Europe North America Asia Pacific Others With the Eurozone unemployment rate hitting an all-time high in Q1 2013, deal activity relatively slowed in the region, recording 15 deals (44.1%) in Q The UK is the third largest market globally. It is among important geographies of interest for global buyers, representing 48.1% of European targets during 2010 and Q The interest for UK-based targets soared 68.2% from 22 deals in 2010 to 37 deals in The other prominent European HR services markets (France, Germany and the Netherlands) witnessed 49 deals, representing 22.7% of total European target deals during the past three years. This accounted for a combined value of $202.4mn in deal activity. European targets reported a median deal value of $3.6mn, while North American targets reported the highest median deal value of $46.1mn globally. At the same time, North America attracted the highest deal values, accounting for 44.2% of the global deal values between 2010 and Q1 2013, despite lesser deal volume (105). Its deal volume rose from 31 deals in 2010 to 38 deals in 2012, registering a 22.6% rise. Owing to improved M&A activity in North America, deal valuations also rose. The average valuation multiples increased from 0.28 times LTM revenue in 2011 to 0.39 times in The Deal value 1% 26% 28% 55,8 27,1 14 3,1 Europe North America Asia Pacific Others 44% Note: Deal volume (2010 Q1 2013) = 387 deals; Deal value (2010 Q1 2013) = $6.1bn. Source: Evalueserve Analysis acquisition of Apex Systems Inc. by On Assignment Inc. in 2012 had the highest valu- single largest HR services market by 2012 At a country level, the US represents the ation multiple of 0.97 times 26,3LTM revenue 44,2revenues, with 28,3nearly a 32% 1,2share, although it is highly fragmented. The country among deals with North American targets. accounted for 93.3% of the overall North During the first three months of 2013, North American deal activity. According to the US American deal activity performed better, Bureau of Labor Statistics, temporary placements in the region improved immediately with 13 deals representing a 38.2% share in the overall global deals, beating the yearly following the recession. In addition, more average of 27.0% between 2010 and growth in permanent placements and professional/specialist staffing is expected as The improving deal activity is an indicator of an improving economy and a healthy operating environment for many HR services in the region. the employment rate continues to improve businesses. 13

14 M&A Overview & Analysis 3 The announced deal activity for Asia Pacific (APAC) targets was 54 deals, accounting for a 28.3% share in the global deal values, with a $2.2mn median deal value. Its deal activity was led by increasing buyer interest in Japan, which accounted for 48.1% of Asian target deals. Japan, which is the second largest HR services market globally by 2012 revenues (with a 17% share), attracted M&A interest from both Japanese buyers and also HR companies around the globe, especially from leading industry players. For instance, Adecco acquired VSN, Inc. in 2012 to double its exposure in Japan s professional/specialist staffing market. Similarly, Randstad acquired FujiStaff in 2010 to increase its presence in Japan. Of the remaining APAC targets, Australia attracted the second most interest, accounting for slightly over 20% of APAC target deals. Its deal landscape looks promising, backed by its booming mining sector (discussed in the key themes section). By buyer s origin, Europe dominated the sector activity and reported 196 (56.6%) transactions between 2010 and Q1 2013, as shown in Figure 11. These acquisitions were primarily local, with 185 (94.4%) of these acquisitions taking place within the European region. HR services firms with a diversified sector strategy were the buyers favorite here. Of 196 deals, there were 44 deals (22.5% of total deals) during 2010 and Q1 2013, where firms offering varied services to different sectors were the acquisition target. This was followed by the IEC segment, which contributed 10.7% (21 deals) to M&A activity. Further, nearly 54.6% of the deals (i.e. 107 deals) by European buyers were targeted at firms providing general staffing services. The acquisition of firms offering professional/ specialist and executive search services accounted for 31.6% (62 deals) and 13.8% Figure 11: Regional deals by volume and value by buyer s origin, 2010 Q % Note: Deal volume (2010 Q1 2013) = 346 deals for which buyer information was available; Deal value (2010 Q1 2013) = $6.0bn. 2% 30% 57% 30% 1% (27 deals), respectively, of the total acquisition activity by European buyers. 1,4 The trend 2,8 tion of Apex 1,8 Systems by On 0,1Assignment 14 in 2012 from 9 in The acquisi- clearly shows that in Europe, the consolidation of general staffing firms catering to blue collar workers and having clients in various sectors continues to be a regular activity. North American buyers invested the most, accounting for 46.3% of the $6.0bn global disclosed deal values between 2010 and Q This was driven by the growing preference for professional/specialist staffing firms among North American buyers. The number of such deals increased to Deal volume Deal value % 23% Europe North America Asia Pacific Others Europe North America Asia Pacific Others for $693.7mn was the largest deal in Between 2010 and Q1 2013, the acquisition of professional/specialist staffing firms accounted for 32.7% of total deals, while the acquisition of general staffing services firms contributed 48.1% to total deals. Source: Evalueserve Analysis During the same period, APAC accounted for a 29.8% share of the global disclosed deal values with 38 deals. Buyers preference for general staffing services firms at nearly 63.2% grabbed the largest share. 14

15 M&A Overview & Analysis 3 M&A Targets: Private vs. Public Companies Competitive Pressure Figure 12: Deal volume by target company type, 2010 Q % 7% Private company Public company Others 87% Note: Others include assets/product deals. Source: Evalueserve Analysis A spurt in M&A activity for private targets has been observed, as companies look to acquire or merge with other companies to grow their business or stay competitive. This has helped them tackle competitive pressures, advancements in technology and difficult economic conditions. Maarten Wolleswinkel BSS Specialist M&A International Inc. The Netherlands As M&A targets, private companies represented the vast majority between 2010 and 2013 YTD, as shown in Figure 12. Their number ticked up from 89 deals in 2010 to 118 deals in In fact, the deal volume also remained strong in the first three months of 2013, with an 82.4% share in the overall deal volume. Note that public targets represented only 6% of the deal activity during the past three years, but accounted for a 24% share in total deal values. More than half of such public targets were eventually made private. Private equity groups were quite active in acquiring public targets, as shown from the selection of transactions in the table above. Table 2: Selection of transactions Date Deal value Buyer Target announced ($mn) Oct-12 Gilde Buy Out Partners TMC Group N.V. (The Netherlands) (The Netherlands) 90.3 May-12 Management Buy-Out Morson Group plc (UK) 76.2 Feb-12 Network Group LDC Ltd. Holdings Plc (UK) (UK) 38.8 SBI CAPITAL Co., Ltd. Aug-10 (Japan); VSN, Inc. Ant Global Partners (Japan) 41.8 (Singapore) Source: Evalueserve Analysis M&A Deal Makers be it the addition of a new geography, service line, customer or management talent. Since late 2010, against a backdrop of stabilizing economies worldwide, there has been a gradual and cautious return of buyers in the HR services M&A market. These buyers are mostly companies that have fairly weathered the recessionary cycle and entered the M&A market steered by their experienced, confident management teams and strong cash balances. They have focused on acquiring the targets which align with their long-term strategic growth plan, After the low point for HR services M&A in 2009, several major HR services deals were announced during late 2010 and Leading HR services providers such as Adecco, Randstad and Manpower were highly active during , but were relatively less active in 2012, as they were digesting their recent acquisitions. However, the M&A pace continued its momentum with more M&A transactions being announced in

16 M&A Overview & Analysis 3 than any time in the past five years. This time around it was not large publicly traded companies but private equity-backed buyers driving the market acquisition activity. The share of private acquirors increased from 77.5% of total deals in 2010 to 80.8% in During 2010 Q1 2013, their share in total M&A activity was 80.9%. During the period, many of the otherwise highly acquisitive public HR services buyers such as Staffmark and SFN Group were acquired and taken private. Figure 13: Deal volume comparison by buyer company type, % 22.5% 19.2% 80% 60% Private company 40% 77.5% 80.8% Public company 20% Deals executed in the past three years by leading players in the industry (as listed below) showcase an active period, followed by a cooling-off in the past year. This was primarily because the leading industry players were digesting their acquisitions. With this, could be a comeback year for these firms. 0% Note: Based on 346 deals for which buyer information was available. Table 3: Selection of transactions Source: Evalueserve Analysis Date announced Buyer Target Deal value ($mn) Jan-10 Aug-10 Sep-10 Oct-10 Mar-11 Mar-11 May-11 Jun-11 Jul-11 Jan-12 Feb-13 Randstad Randstad ManpowerGroup Randstad Adecco ManpowerGroup Adecco ManpowerGroup Randstad Adecco ManpowerGroup Corridor AS (Norway) FujiStaff Holdings Inc. (Japan) Stealth Consulting SAS Others (France) Electricity T&D 77.5 ProfiPower 22.5 Kft 80.8 (Hungary) 19.2 Trainico Training und Ausbildung Cooperation in Berlin Brandenburg GmbH (Germany) Xi'an Foreign Enterprise Service Co. Ltd. (China) Medic-Zeitarbeit GmbH (Germany) REACH HR (China) SFN Group, Inc. (US) VSN, Inc. (Japan) Workshop Bemanning & Kompetanse AS (Norway) Source: Evalueserve Analysis 16

17 M&A Overview & Analysis 3 Most Active Buyers by Industry Type Strategic buyers, largely comprising HR services firms, represented the largest share of transactions by volume (86.4%) as well as deal value (65.2%), as shown in Figure 14. They invested in deals with a median valuation multiple of 0.35 times LTM revenue. Financial buyers, comprising private equity groups (PEGs), banks, etc., invested in lesser deal volume (13.6%), but shelled out higher deal values (34.8% of total disclosed deal value) between 2010 and Q Their deals had the median valuation multiple of 0.50 times LTM revenue. PEGs Active For several years, PEGs have been investing quite actively in the HR services industry for add-on acquisitions as well as platform investments. Their inducement towards this sector was, among others, driven by the obligation to invest their idle funds. Jan P. Hatje BSS Specialist M&A International Inc. Germany The capital raised by private equity firms from 2002 to 2008 was largely underinvested, leaving these firms with more than $500bn of non-invested capital postrecession. The pressure to invest this Figure 14: Deal volume by buyer type, 2010 Q % Strategic buyer Financial buyer 86% Note: Based on 346 deals for which buyer information was available. Source: Evalueserve Analysis corpus coincided with the comeback of well-performing HR services companies general staffing earned a multiple of 9.6 times. post-recession, which made 86,4 for attractive 13,6 acquisition targets. The desire to invest funds received further impetus by the good valuation deals that PEG players have realized over the past few years. What Are Buyers Buying? At present, buyers in the M&A HR services market have varied interests in terms of size, location or sector served by target Strategic demand for diversified staffing: Although the HR services firms serving specific sectors/industries have been popular among strategic buyers seeking platform acquisitions, the firms with a diversified sector strategy also witnessed persistent buyers interest. These buyers, however, have been selective and the acquisitions have largely been driven by the objective to establish similar operations in specifically targeted countries. companies. However, buying activities have shown the following key trends: New wave of interest from services/solutions companies and outsourcing firms: Preference for professional/specialist HR HR services: Buyer interest is also emerging internationally from outside the HR services Firms specializing in professional/specialist staffing have been the most soughtafter acquisition targets, largely because of higher margins and the longer-term nature of their business. Companies in this sector have recorded the fastest recovery since the 2008 recession. industry. This indicates an important development in M&A activity within the industry, which has mostly seen industry players or private equity companies as buyer groups. This inclination is driven by the scarcity of HR in buyers sectors, which are mostly in the IT, healthcare and financial services sectors. The acquisition This is clearly evident from the multiples at which these companies were bought. During 2010 Q1 2013, firms providing professional/specialist staffing were by German IT staffing and software firm Allgeier of Turkey-based Oxygen Consultancy is a noteworthy transaction, confirming this trend. bought at an average multiple of 9.8 times LTM EBITDA, while those providing 17

18 Forward Looking Themes 4 The Mining Boom, a Bane for the Australian HR Services Industry PEGs Table 4: Selection of transactions Investment Exit value Target value (period) (period) ROI Rising Demand Kohlberg Kravis Roberts Intelligence, Ltd. $358.1mn (Jun-10) $723.2mn (Mar-13) 2.0x Cereberus Capital Advantage Resourcing (American & European Unit) $196.0mn (Apr-08) $410.0mn (Jan-12) 2.1x RJD Partners Teaching Personnel Ltd. $48.8mn (Jul-07) $70.4mn (Jul-10) 1.4x Note: Average exchange rate of /$: (Jul-07) and $ (Jul-10). Source: Evalueserve Analysis Average exchange rate of /$: (Apr-08). ROI stands for Return on Investment. Australia is one of the leading exporters of coal, iron ore and gas. The unprecedented demand for these resources is driving the boom in Australia s mining sector. With this, the demand for personnel is also getting stronger by the day across every part of the mining sector, from blue collar to senior management. Paul Young BSS Specialist M&A International Inc. Australia Amid such a scenario, an HR services company looking to grow offshore would consider a stake in the Australian market, especially if the mining boom continues. This overseas interest towards Australia will add to the Australian workforce needs, and also lead to M&A opportunities within the HR services sector. Australia accounts for 5% of the global HR services annual sales by 2011 revenue. Private Equity Groups (PEGs) Are Here to Stay During , PEGs had a strong investment appetite with surplus cash of more than $500bn in uninvested capital after the recession, according to SIA. At this time, platform acquisitions within HR services looked appealing to such PEGs, who were looking to make sizable investments across sectors. Over 2010 Q1 2013, many PEGs exited their investments profitably and reaped double the value. Selected examples of such exits are shown in the table above. The preferred PEGs investment cycle for at least doubling the investments in the HR services sector is usually three to five years, based on market conditions. PEGs will continue to reap their investments over the next couple of years, and thus can be the driving force for promising M&A activity in the near term. Alongside this, with significant committed capital to invest (last estimated to be approximately $430bn by SIA), further investments by PEGs in the sector are anticipated. Such investors will continue to put their money in growth companies possessing strong management. Middle Market Seeking Attention Owing to the uncertain global economic environment, companies organic growth has relatively slowed. This has increased their confidence in the inorganic mode of growth via middle-market acquisitions. Instead of investing a large sum on a single large acquisition, buyers find it safer to invest in middle-market companies. Over the 2010 Q period, this trend can be observed given that only a handful of large deals were announced. According to Capstone Research, middle-market firms in the industry are proving to be attractive acquisition targets, offering geographic coverage, differentiated services, blue chip customers and talented management teams that can be immediately accretive to the acquiring organization. 18