M&As on the rise, but doubts remain

1 September 2010 | By Colin Cottell

Last week, feverish activity returned to the world’s financial centres, with a series of major international companies, among them HSBC and SABMiller reported to be on the acquisition trial.

Analysts point to this as evidence of a broad-based recovery in Mergers and Acquisitions (M&A) activity, but what about M&As within the staffing industry?

This year has already seen a number of deals, including HCL’s acquisition of Redwood, and Morson’s purchase of Wynnwith. Private-equity firm Graphite has also weighed in and bought Teaching Personnel. (See Key Facts below). Such deals could suggest that the industry is on the cusp of a wave of mergers and acquisitions.

Corporate financiers working in the sector agree that, compared with last year, there has been an increase in M&A activity.

Daniel Walters, project manager at Optima Corporate Finance, which advised on the sale of Alpha Facilities Management to Aktrion Holdings, says he has seven to eight “live projects”. “This time last year, we probably had less than half [of that number],” he says.

Walters aims to complete two deals by the end of the year, one valued at about £25m and the other at about £16m.

The key difference between this year and last year is confidence, says Walters. “People are getting the feeling that the tough times are behind us, and they are looking to strategically build their business, to dispose of their business to get some sort of earn out.”

David Silver, founder member of Baird’s mergers and acquisitions team in Europe points to improved visibility on company earnings, and a general improvement in economic conditions. This year, Baird sold US staffing firm Comsys IT Partners to Manpower for £269m. “The staffing sector is always one that attracts a lot of interest as the market picks up,” he says.

Andy Hogarth, chief executive and chairman of industrial recruiter Staffline, which this year made two acquisitions, says higher valuations are encouraging owners of staffing businesses to sell.

He says this trend has been reinforced by banks’ increased willingness to lend to companies like his own that have a decent business proposition and a strong balance sheet.

Tim Evans, a director at Catalyst Corporate Finance, says there is a lot of pressure on staffing companies to go down the M&A route. “A lot of quoted companies are under pressure to grow their business again, while others are under pressure from their clients to grow their geographical spread,” he explains.

Industry analysts point to a number of sectors that are particularly ripe for M&A. These include, oil and gas, and white collar specialists who remain in the sights of international staffing giants Adecco and Randstad, and are attracted by their high margins. Charles Simpson, head of corporate finance and partner at

Saffery Champness’ recruitment team, predicts that headcount reductions in permanent staff and greater use of contractors will generate “a lot of interest” in UK education and health recruiters.

Kean Marden, head of support-services equity research, global banking and markets, at The Royal Bank of Scotland (RBS), says that recruitment agencies with substantial overseas operations, which are enjoying rapid growth are particularly “well placed”. “This provides them with the cash flow and management confidence to acquire struggling UK competitors,” he explains.

While there is consensus that a pick-up in deals is likely, this is by no means a one-way bet. Evans cautions that most prospective deals are still at the ’look-and-see’ stage. In his view, a further period of economic stability, of perhaps six months is necessary to turn talk into done deals.

While Stuart Hands, partner at Fusion Corporate Finance, adds that deals will take longer to complete “People are more careful and more risk averse and want more information before making a decision,” he explains.

Others say the market has not yet returned to full health. Ian Thornley, managing director at Staffing Partners, corporate adviser specialists to the staffing industry, says most M&A activity still involves distressed companies. “There is not a lot of activity for good solid businesses with fair valuations,” he says.

The biggest potential spanner in the works is the dreaded double dip. But for now, at least, it’s a question of when and not if M&A activity continues to rise.