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Mergers & Acquisitions - How do Recruitment Industry Managers Compare?

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This month we will compare the performance of Recruitment industry owners and managers in merger and acquisition transactions with their external counterparts. How do they stack up with other industries? HHMC's Principals only work with client organisations that operate in service industries. Mostly this is with either Recruitment or Information Technology companies but has also included the fields of Engineering Consulting and Public Relations firms. So it is a limited comparison and based only on personal experience. As we have no means of measuring competency in this case we offer only a subjective view and accept any criticisms on that basis.

Industry Structure

Before we discuss the relative performance merits it is worthwhile to look at the overall landscape of the Recruitment industry. There are no clear sources on just how many recruitment companies there are in Australia; the best guess is that it is over 3000. With no real barriers to entry it is no wonder that it is hard to keep track of the one and two person businesses that operate as recruiters all or some of the time.

The Recruitment industry has one person companies competing right alongside global giants. If you have a good business relationship in place you may well have a client to place candidates with. This is whether you are doing it all from your home office or from your workstation alongside a hundred colleagues. The fragmentation of the industry means that it is very difficult to describe an average recruitment firm. There are lots of medium sized (by Recruitment industry standards) companies that have grown to say 6 to 10 staff but struggle to take the business to a greater level despite their hard work and keen intentions.

Fortunately the entrepreneurial spirit is alive and well in recruitment with many people still starting up their own business, perhaps with a partner or two, after a few years of working for someone else.

If we look at this environment and compare it to the IT industry we see that IT overall has fewer organisations (not necessarily people in the sector) with those organisations probably in a tighter range of size, at least locally in the purely domestic market. There are global players; many more publicly listed Australian companies and some quite large private companies. Of course there are start-ups as well but we would be fairly confident that their numbers don't match the Recruitment industry. The IT industry is defined here as those organisation who provide either IT products or services to their customers.

Related: Leadership in Mergers & Acquisitions

So with the market landscape as described in the Recruitment industry it is probably not surprising that there is a very wide range of ability and experience in owner and management ranks.

Business Owners Position

It is more common for HHMC to deal with someone who has a direct equity stake in the business in Recruitment than in IT. When we speak with sellers and often buyers in the recruiting arena we are more likely to be dealing with an owner. In IT it may well be an executive with delegated authority who has this task. This is good and bad! Those things that make an owner of a business driven to take the risk and create a business may also make them confident that they know what they are doing in the M&A area. It isn't always the case unfortunately, especially when they have not been down that path before.

In our experience, if we were to highlight one significant difference between managers in these two industries it is in the willingness to listen to professional advice in the M & A process. It is not an uncommon experience to encounter people in the Recruitment sector who are very sure that they know the value of their business and just why it should be at a premium to prevailing market pricing. This is sometimes a strongly held conviction seemingly based on the years of battling the ups and downs and the hard work they have put into their business. Perhaps this might be referred to as sweat equity. Unfortunately for them there is no value in it.

The tendency to overestimate the value of their own business just occasionally equals the propensity to downplay the merits of a company they may be considering buying.

Given that there are fewer barriers to entry in recruitment than in many industries the volume of M&A transactions is not that great. While we are experiencing some levels of consolidation over the past two to three years it has often been an easier option to instead hire some consultants and open up a new division. This is not an option that we hear put forward very often in IT sector M & A assignments Many of the equity transactions that take place within recruitment in any month are on a smaller scale than those within the IT arena. The lack of a larger volume of M&A activity in the Australian Recruitment market means that recruitment industry executives overall do not have the same level of exposure to some of the issues that arise in M & A transactions. This also applies to a lack of experience from hands on involvement in integrating the newly acquired company into the existing business.

For those who have had involvement within the recruitment industry they know that the intensity of daily activity for many companies is as high as you may expect in any industry. This doesn't often allow much time for managers in the small to medium businesses to work on the business as they are often so much forced to work "in it".

Even in larger scale recruiting enterprises managers are spread thinly so their capacity to be an effective part of an acquisition team is limited.

This is not to say that IT industry executives have much idle time, however, there does seem to be a greater preparedness to delegate aspects of an acquisition or even sale process to other key executives than the CEO. The IT industry has grown to a level of maturity not yet achieved on an industry basis within Recruitment. Exposure to global competition over many years has had an impact along with the overall scale of the industry.

ASX Listed Companies

The Australian Securities Exchange (ASX) has a dedicated industry code allocated to listed Information Technology stocks which has two sub industry groups within it; Software & Services, and Technology Hardware & Equipment. ASX listed Recruitment companies are listed with other companies under Commercial Services & Supplies which is a sub group under the Industrials industry code.

There are only around ten or so Australian listed Recruitment company stocks while there are over 200 in the IT sector. Talent2 Limited is actually listed under Information Technology; Software & Services, which reflects the history of its original listing as Concept Systems International.

At least in our experience it also appears more common for Australian based IT companies to have established an Advisory Board or to have structured themselves as a public unlisted company, a good step in developing the governance procedures and disciplines required if contemplating undertaking an IPO.

Although we have portrayed the Recruitment sector as a bit less sophisticated as an overall industry there are certainly many examples of high levels of experience and capability in managing acquisitions. If we look at companies like the Skilled Group, Chandler & MacLeod, Candle, Ross Human Directions and Integrated (who have recently themselves merged with PMS Limited) there is a substantial record of successful M&A transactions. And the Rubicor Group has melded together a large number of separate organisations to form the most recent ASX listed Recruitment stock. The team at Talent2 of course, have a strong lineage in acquisitions and divestments over many years.

A number of private companies have experienced and talented executive teams who can point to senior level M & A experience in other industries as well as in recruitment.

In this article we have focussed on the purely Australian owned companies but a review of managerial experience in our Recruitment industry environment should include international organisations like Aquent, Vedior, Manpower, Adecco, Hays, Empresaria and others that at both the global and local level have extensive track records in Mergers and Acquisitions.

Summary

For the smaller companies, and that is the vast bulk of companies in the industry, their experience with an equity transaction is often a once-off. The time comes to investigate selling or sometimes to look at options for buying a company. It is not surprising that emotions come to the fore when as an owner you are searching for a buyer for your business and then struggling to come to terms with why they don't offer what you think its worth.

We believe it is the fragmented nature of the Recruitment industry, with so many small businesses that dictates the experience levels of managers and owners. Running a small business for years can become a bit isolating; your interactions are mostly with your clients and your own staff. Thats great for business but not for the owners personal development and growth.

What can business owners in these situations do? Make time to become more informed by reading, attending appropriate seminars and most importantly remember that you don't have to do it all. In the same way that you would use your external accountant to prepare your annual accounts so should you enlist the advice of an experienced professional in the M&A field that you feel you can work with to achieve an effective result.

Article Written By Richard Hayward of HHMC

Categories: M&A

Tags: Strategy, Acquisition and Divestment, Recruitment, Mergers and Acquisition, m&a transaction, Buy and Sell Business, advisory services

Picture of Richard Hayward

Richard Hayward

Richard has 35 years of experience with outsourcing, recruitment and advisory firms. His record of achievement includes national recruitment management roles, and executive search and selection across the ICT, banking & finance and sales & market sectors. Since 2003 Richard has been a principal of HHMC, guiding recruitment agencies through acquisition and exit assignments. Located in Sydney, Richard works with private and public recruitment agencies globally. HHMC’s innovative business strategies and well-grounded guidance result in clients realising their personal and corporate goals.

P: +61 2 9221 8285 M: +61 411 488 544

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