A look into the health of the market and what recruitment companies can learn from the current activity.
Despite the recent economic turmoil and uncertainty, the recruitment industry seems to be in a healthy way based on the amount of merger and acquisition activity currently occurring. While the global financial crisis clearly caused difficulties for many businesses, the effects of this event have now passed and confidence is returning among investors and businesses alike. According to Carl Swansbury, partner – corporate finance at Ryecroft Glenton Corporate Finance, while there was some slow down in M&A activity prior to the European referendum, transactions which had been stalled or slowed by the process picked up again two to three weeks after the result was clear. Moreover, a number of high profile transactions completed over summer, which ultimately delivered a better performance than the firm had expected from this year.
Rod Hore, director at HHMC who has a more Asia Pacific oriented view, perceives high levels of business deals, but a reduction in the number of buyers willing to take on larger transactions. “This could be, of course, just a hangover from the above average number of notable deals in the past 12-24 months,” he comments. “The Asia Pacific region is not isolated from international issues and our two major influences, the UK and USA, are both in periods of business uncertainty. Therefore deals involving international partners appear to be slower than recent years and there is little enthusiasm from the IPO market or from Private Equity.”
Michal Mlynarczyk, CEO of Devonshire Investment Group agrees that across Europe, the market is now at a higher point than before 2007. One major influence here is the attraction of the European market for American based recruitment firms. The primary influence he believes is that many US companies look to Europe in order to achieve further growth and as a pathway to becoming truly global enterprises. US recruitment businesses are generally bigger than their European counterparts, making transactions relatively easy from a financial point of view, and buying into the market – rather than seeking to establish a new branch and drumming up new customers – is a highly attractive way to take the business to the next level. Add to this the exchange rates (although these comments came prior to the US election results) and it’s easy to see why US business are keen to buy into the continent.
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Mlynarczyk also highlights the growing use of technology within the recruitment sector and how this can drive interest among both investors and recruitment businesses. The innovative and effective use of technology lies behind some investment deals as well as recruitment business’ general desire to take on board the latest and/or most effective technology to make their recruitment business more profitable. “There has been a lot of noise about technology breakthroughs,” says Mlynarczyk. “The question is always whether some sort of matching engine will be able to replace recruiters. However, it is clear that there is no single way forward and no single organisation that has found a way of making this a complete success.”
Both job boards and agencies are still working out exactly how to bring on their technology, how to invest, develop and implement it to have the greatest impact. Alongside these developments, then, there is another facet of investment activity. Potential disruptors – online staffing platforms and the like – may prove attractive to some companies and investment houses as an ‘add-on’ or for future proofing a company. Whatever way recruiters access this technology Mlynarczyk notes there also has to be change within recruitment companies to show they are ready to perform more efficiently: “It requires companies to redefine their operation and identify what their candidates need,” he says. “It’s not just about putting the candidate and client together, it’s about adding value. The technology will take away the simple tasks but the recruitment businesses still need to deliver for their customers.”
Interestingly, Mlynarczyk’s assessment of the current market is also that recruitment companies who want to succeed and be seen as attractive propositions for buyers should no longer view themselves as purely competing against other recruitment companies. In vying for the attention of great candidates it is not just alternative roles that they need to pitch themselves against but other products and services which might attract their candidate’s attention. “It is no longer simply how do I make sure I stand out from another recruitment company, but how do I make sure the finance director is looking at this job advert instead of a car advert,” he says. “The message is almost why don’t you upgrade your career instead of your car. That has changed the way of thinking about recruitment job posts.” In a high-volume media rich world, getting a message about recruitment heard can be a task in itself and any business that finds a way of doing this will be an attractive proposition for investors.
Earlier this year, Ryecroft Glenton Corporate Finance advised on a significant deal which saw the Japanese firm Trust Tech Inc. acquire an 85 per cent stake in MTrec Limited, one of the North East’s largest providers of staffing and training solutions. The company’s first significant acquisition outside of Japan. Carl Swansbury explains that the acquisition was carried out to establish a presence for Trust Tech Inc. in the UK and European markets. “This is a very positive transaction for the North East, and demonstrates the high levels of interest overseas companies have in acquiring fast-growth, profitable, well-run UK based businesses,” Swansbury commented at the time. Trust Tech clearly values MTrec’s established operation and the strength the company has in serving clients in a variety of industries with ever changing temporary and permanent workforces as well as training requirements.
The attractiveness of MTrec was party due to the markets it serves. As Swansbury explains, recruiters who are addressing in-demand areas of talent, or working in sectors where access to talent is more difficult can expect to be viewed more favourably than those who are addressing more generic, lower level skills. “If we look at the UK market there are certain industries and sectors that are still suffering from significant talent shortages – the education, engineering and medical sectors for example,” he says. “In those candidate and talent short markets there is significant growth among businesses who can bring in talent from overseas. These type of businesses will often be more attractive to buyers because the barrier to entry is higher.”
While businesses in these candidate and talent-short sectors are performing well, some sectors including construction are being viewed with less enthusiasm, as the wider market experiences nervousness about forward investment. If there are fewer construction schemes getting the go ahead, there will be less demand for talent, less of a certain future for the recruiter in that industry and therefore the value of the recruitment business will be reduced.
Keep your people
However, market promise is only part of the picture. Due to their service nature, recruitment businesses have very little in the way of tangible assets for investors to latch on to. Instead, they need to see exceptional talent working in the organisation, and talent that is likely to stay in the organisation, post completion of a transaction. “We’re certainly seeing significance importance being placed on management teams in recruitment businesses,” says Swansbury. “Scaling up a business at any time is a challenge but to do it now you need a capable and committed management team.” Key personnel should therefore be appropriately incentivised for their work and even locked into the business come what may. “The intrinsic value of a business lies in the operational management team,” he asserts, “so tying that team into the business beyond completion of the transaction is very important.”
Other areas which Swansbury believes should be considered important in valuing a recruitment business include the type of business carried out – temp/contractor companies tend to achieve a higher P/E multiple than permanent recruiters simply because there tend to be firm contracts in place and therefore a forecastable revenue stream. Scale is also important: “From a buyer’s perspective if there are five or six locations within the business which are profitable then there’s an ability to scale the business further,” he says. “This means there’s the potential to grow the business under the model the vendor has created. A single site business on the other hand has not shown how it can be scaled, and therefore is likely to attract a lower P/E multiple on sale.”
Even if a recruitment company isn’t immediately looking for a sale or hoping to execute an exit from the company, considering the acquisition market can indicate lucrative directions in which to take the business. It will also show where and how business leaders can strengthen their offering, enabling them to secure their own future and that of the consultants they employ. In that way, whatever lies ahead, the business will always be ready to flourish.
Article first published in The Global Recruiter 2016