Maximising value and avoiding the ‘Plateau’

How acquisition strategies can create further value for Human Capital companies


The ‘plateau’, if not fall, witnessed in Human Capital public interest company multiples in 2015 despite improving UK economic conditions is an increasing concern for corporates, with a number of large companies witnessing a marked decline in EV/EBITDA multiples after several years of increases (see chart below). This begs the question as to why so many businesses within the industry have suffered from such a fundamental shift and how others have managed to thrive in contrast?





A fall in valuations usually signals the market reducing its expectation of short to medium-term growth in public companies. Within the Human Capital industry this can be largely attributed to global macro-economic conditions which have varied greatly in 2015. Political and economic risk within the Eurozone has certainly been amplified with fears of Greece leaving the EU looming over the continent’s shoulder, whilst geo-political risk in Russia and the Middle East mixed with low oil prices has reduced any desire to establish or increase exposure to these economies. Closer to home, a UK general election followed by a referendum on EU membership has increased business uncertainty, a key barrier to market buoyancy. The impact on Human Capital companies has been pronounced with recent reports showing Harvey Nash Group to have suffered greatly due to currency headwinds, limiting its year-on-year growth to just 0.8% in Q1 2015. Others such as Robert Walters have mistimed their M&A strategies, with the company having had to scale back operations in countries such as Brazil due to challenging economic circumstances. Hays and Michael Page have both also seen a slow expansion in their Indian presence, with a culture of small fee margins constraining profitability in the region. So what can corporates do differently to succeed?


Success in this low growth global environment hinges on a company’s ability to anticipate and respond to challenges.


In order to protect value, businesses must secure margins and enhance market share. Companies must first Build Resilience in order to weather volatility and negative business cycles in a continually changing global regulatory landscape. As HC corporates grow in size and across geographies they must also adapt strategies and Harness Complexity in order to avoid losing focus and alignment, key impairments to value. Lastly management must Master Globalisation, through understanding local economies, political and regulatory climates, cost environments, talent pools and work cultures of each market. This will become increasingly significant as economies such as China, India, Brazil and Japan work to reform their stagnating economies resulting in greater market liberalisation. Consequently overall economic performance will vary more widely across geography and sectors than at any other time.


A clear and planned M&A approach plays a pivotal part in all three of these strategies. M&A can allow corporates to diversify or reinforce sector expertise and thus enhance market share in order to build resilience and maximise value. Furthermore, public company takeovers of private companies allow multiple arbitrage, the practice of increasing the value of a public company without having made any operational improvements to it, bringing higher valuations. Empresaria PLC’s acquisition of Ball & Hoolahan Limited, has therefore provided an opportunity for the company to replicate its sector success within its wider network whilst delivering immediate earnings improvements to shareholders. Impellam PLC’s acquisition of Lorien Limited is also consistent with the company’s strategy of adding new disciplines via acquiring specialist private staffing companies, resulting in higher valuations.

Furthermore, organisational complexity can be avoided if suitable and clear acquisition criteria are established early in an M&A process and potential operational synergies are identified and implemented, thus giving equal importance to both the pre and post-acquisition phases. Clarity and constant revision in M&A strategy will avoid costly M&A mistakes which can take years of corporate restructuring and realignment to fix. RTC Group suffered greatly due to previously poorly managed acquisitions where integration failed to enhance shareholder value. Conversely, its recent acquisition of RIG Energy for its subsidiary Ganymede Solutions has built value into the engineering company propelling its valuation multiple to a three year high.


In order to master globalisation in a lower growth, more disaggregate world, HC corporates will need to regularly recalibrate investments, divest assets in lower growth jurisdictions/sectors and acquire new ones that provide a foothold into economies and markets that offer genuine growth. Examples such as Adecco's recent acquisition of Canadian based Executive Search firm, Knightsbridge Limited, targets both a successful sector and region of the Human Capital industry further fuelling increasing valuations after several similar transactions in the US (2014) and Japan (2012). While M&A is by no means a silver bullet to falling valuations, it is clear M&A will be key part of the successful adjustment process required for corporates facing consistently shifting global economic and regulatory landscapes. Those without an effective M&A strategy risk falling behind indefinitely in an ever-changing recruitment market.

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