The Osborne Clarke/Recruiter Recruitment Sector M&A Barometer

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1 Recruitment Sector M&A Barometer June 2013

2 The latest M&A barometer shows the return of confidence to the market with 89% of respondents believing there will be an increase in recruitment sector M&A over the next 6 months. We have had an interesting mix of respondents, giving us powerful insights from across the sector. CEOs made up 61% of respondents (more than in previous surveys) and as before, over 90% of respondents generate the majority of their revenues from professional/technical recruitment. As we see new players entering the recruitment market more than 80% of respondents think that at least 5% of traditional recruitment agency revenues are being lost to jobsites and digital recruiters who are making increasing inroads into the sector. I hope that you find this summary of our research useful. Please do contact me if you would like more information or to discuss any of the issues raised in this briefing. Kevin Barrow Partner Osborne Clarke Key Headlines 1. 89% of respondents (up from 67% in our last survey) think that M&A activity will increase in the next 6 months % see this as a trend of market consolidation. 3. Asia is seen as the area to be in to be appealing to an international buyer. 4. More than 80% of respondents think that at least 5% of traditional recruitment agency revenues are being lost to jobsites, online exchanges and networking sites. 1 of 4 Osborne Clarke June 2013

3 M&A a return to confidence The most striking statistic from the survey is that a whopping 89% of respondents believe there will be an increase in recruitment sector M&A over the next 6 months (up from 67% a year ago), a finding given added force by the fact that 61% of those answering the survey are CEOs. Not surprisingly more than three-quarters of respondents think that uncertainty over the US and UK economies is likely to affect buyer appetite. Notwithstanding this, nearly two-thirds are expecting to buy, sell or fundraise in the next 6 months. Continued international expansion To make themselves more attractive to hirers (and in some cases no doubt buyers as well!), recruiters continue to expand internationally, and Asia (especially Singapore, Hong Kong and China) is seen as the area to be in to be appealing to an international buyer. The majority of respondents (56%) see this as part of a trend of market consolidation. This may support the theory that being small or local is an increasingly tough experience for many recruiters as hirers reduce their number of suppliers in order to address risks around supply chain tax, compliance and employment law. Acquisition targets are expected to cluster in the 5m to 35m range (nearly 70% expected to be in this segment). This may reflect the fact that businesses with too small a critical mass are not attractive to buyers, whilst there is a relatively small pool of buyers (and relative lack of acquisition finance) for larger companies in the sector. 2 of 4 Osborne Clarke June 2013

4 "This may also explain why a number of our contacts now regard Singapore as over-supplied in some subsectors of the industry. Germany also featured strongly reflecting the strength of the technical/professional contingent labour market there (often still at significantly better margins than, say, in the UK)" The relative attraction of sectors We believe that there are still more sellers than buyers in the marketplace at the moment, but a sector which continues to be in significant demand from buyers is Oil & Gas. Nearly three-quarters of respondents believe that Oil & Gas is the sub-sector of most interest to buyers at the moment. "This reflects our own conversations with buyers, and is a reflection of the vibrant auctions for NES and Air Energi last year. Professional and healthcare also featured strongly, and we are seeing a number of deals in these sub-sectors, with pharmaceutical and telecoms being interesting sub-sectors attracting some interest. Also in our experience, IT staffing companies are increasingly being approached by IT services companies; with a number of IT staffers regularly undertaking statement of work assignments, the distinction between some of what staffers and consultancies do continues to blur." The impact of jobsites, online exchanges and networking sites Given the increasing threat from these new players, it might be expected that traditional recruitment companies would mitigate it by buying or investing in online businesses - however, somewhat surprisingly a significant majority (60%) think that private equity will be the most likely buyers, with only 20% of people believing that traditional recruitment companies will be acquirers. "Earlier this year we attended the SIA Executive Forum in the USA, and much of the talk there was of the growth of online exchanges. It is expected to be a $20bn market in the USA alone by Clearly most deals we are hearing about in the US and UK in that sector do currently involve private equity investors, but we had thought that recruit.co s acquisition of Indeed for $1Bn last year might be seen as setting a future trend in the same way that the online grocery market has in fact ended up (12 years after the dot.com boom/bust) being dominated by bricks and mortar supermarket chains" What is striking from this survey is that more than 80% of respondents think that at least 5% of traditional recruitment agency revenues are being lost to jobsites, online exchanges and networking sites. More than 8% of survey participants think that more than 30% of business has been lost to these media. 3 of 4 Osborne Clarke June 2013

5 About Osborne Clarke in the recruitment sector: An international law firm with a market-leading track record in M&A in the recruitment sector, Osborne Clarke has advised on 12 deals in the sector in the last 12 months. Kevin Barrow Recruitment Partner, Osborne Clarke T: E: kevin.barrow@osborneclarke.com DeeDee Doke Editor, Recruiter T: E: deedee.doke@recruiter.co.uk With years of experience of managing the spectrum of issues facing recruiters, The Legal 500 has described our team as "The 'acknowledged experts' in the recruitment sector." About Recruiter magazine: Published monthly, Recruiter is the leading magazine in the recruitment sector and the source for all breaking industry news and opinion. It publishes a Hot 100 of the most successful recruitment businesses and the Fast 50, the fastest growing privately owned recruitment businesses. 4 of 4 Osborne Clarke June 2013