The market is currently trading sideways after a strong run over the last two quarters. We are starting to see some green shoots of recovery in the economy and investors are split between those who think the rally will continue and those who think the market is running out of steam.

Recruiters continue to report extremely tough trading conditions, however share prices are being supported by rumours that we are now entering into a consolidation phase. Indeed, OPD Group and FDM Group have both received offers from their respective management over the past few weeks and this could be only the start of the sector mergers and acquisitions (M&A) activity.

Adecco made its intentions clear with its ultimately aborted bid for Michael Page that it wanted to increase its exposure to white collar professional recruitment. Adecco now has a new chief executive in Patrick De Maeseneire, who previously led Adecco’s professional staffing unit in New York, and the markets are waiting to see what his next move will be. Adecco has plenty of balance-sheet firepower to make some
large deals.

This is helping valuations, with Robert Walters especially strong in recent weeks despite poor trading, tough market conditions and low visibility. Robert Walters has a strong position in the Asian markets, which is seen as an area of economic growth over the next 10-15 years
and would be a great route into the Chinese market.

SThree recently reported its trading update for the six months to 31 May 2009. On a constant currency basis, net fee income fell by 15% but the group was helped by forex movements and total group net fee income was down only 9% year-on-year. This reflects the resilience of the
contract model which again outperformed the perm business where the number of placements fell by over 30%. The UK job market is still very tough with UK information and communication technology (ICT) placements down by more than 60%.

So while trading remains extremely difficult, valuations appear to be low enough to attract bids, and investors are buying into potential bid targets.

Michael Vassallo, equities analyst, Brewin Dolphin Investment Banking