The recession has devalued listed recruiters while boosting the amount of cash on their books, setting the scene for mergers and acquisition activity.

According to research from corporate advisors John East & Partners, a decrease in the number of temporary and contract staff has reduced the need for working capital, building up balance sheets across the sector.

The research found the total net debt of the 30 listed recruitment companies has dropped from £358m to £114m over the last year.

Ian Jermin, an analyst at John East & Partners, told Recruiter: “It is natural in this industry for companies in depressed times to generate cash because of the decrease in working capital requirements, particularly on the temp/contract side.”

Jermin predicts an increase of opportunistic acquisitions of undervalued, listed recruiters. “As we go through the downward cycle, companies’ cash facilities are going to build up and we should see some activity,” he said.

Jermin cited the recent announcement by interim recruiter Hexagon Human Capital that it had received an offer from a third party recruiter.co.uk, 17February).

“Hexagon is saddled with debt and is in a bit of a precarious position, although they are the leaders in interim management — it’s an interesting acquisition for someone to look at,” he said.

Peter Searle, chief executive of IT recruiter Spring Group, told Recruiter the company was looking at the possibility of making acquisitions.

“The opportunity to buy companies significantly below value is increasing day by day. When you have a potential pot of £80m to spend, you are always looking for the best time to buy companies,” he said, adding organic growth is preferred.

Searle said the company would likely target somewhere it does not have any marketshare. “[We would look at] any where you have zero marketshare and a big machine that can add efficiencies.”

IT recruiter SThree announced massive cash generation in its year-end results for 2008; net cash grew from £3.5m in 2007 to £24.6m in 2008.

Steve Hornbuckle, SThree’s company secretary, told Recruiter the increase was largely due to “sound financial management” and debtor day reduction.

However, the company, which has been built organically, would not be drawn on whether it would consider acquisitions.

Jermin said: “If it bought them into a new business, territory or market, I think they would consider it. They are generating cash like nobody’s business.”

Andrew Burchall, group finance director at multi-sector recruiter Impellam Group, said: “Those who have cash are well placed; assets are cheap at the moment,” adding that companies would also look at share buy-backs.

In the report, John East & Partners highlights Healthcare Locums as a possible target, a company which has maintained revenues due to inelastic demand for healthcare professionals.

“It had a ‘buy and build’ strategy that actually worked,” said Jermin. “It’s almost immune to economic volatility and they knew when to stop buying companies. Now they will look to sell the business on at the right price.”

Mergers and acquisition activity continues among the non-listed recruiters, which are also building up cash reserves, but it is harder to track.

Tony Goodwin, global chief executive of multi-sector recruiter Antal, told Recruiter it is actively looking for acquisitions among undervalued recruiters.

“After our deal in Russia last year [the sale of Antal Russia to the multi-sector FiveTen Group] we have upwards of £10m that we can invest in recruitment and staffing related businesses. “We will also be playing ‘white knight’ to recruitment professionals whose businesses are currently suffering through no fault of their own.”

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