Workforce Solutions Sector M&A – What’s Happening In Current Deals In The U.S. And Europe

KEVIN BARROW

Partner
United Kingdom

Andrew Saul

Partner
United Kingdom

PAUL H. PINCUS

Partner
Ortoli Rosenstadt LLP

Record level of M&A activity in 2021 that is expected to continue into 2022
Buyers are aggressively competing to acquire large quality sellers
Record high valuations are drawing more sellers into the market
Strong economy that is expected to grow 3 – 3.5% in 2022
Healthy equity markets (despite recent volatility)
Abundance of capital
Staffing firms are highly profitable and have ample amounts of cash for acquisitions
Debt financing for acquisitions is readily available at historically low rates
PE firms have record levels of dry powder, have become major market participants in deals above $50m in EV, and are aggressively competing for deals

Cross-border deals increased 68% in 2021 versus 2020, and reached record levels in 2021

Lower European valuation multiples make outbound cross-border transactions attractive to U.S. buyers

Drivers of PE interest in Workforce Solutions:

Perception of staffing within PE has increasingly moved from ‘surge resourcing’ to recognition it is a strategic part of human capital resourcing
Excited by growth potential for the sector
Significant wall of PE money chasing quality assets
Staffing companies’ cashflow fits with a debt leverage model

What does PE look for:

Quality and depth of team
Organic growth profile key (close look at KPIs including conversion rates etc.)
Can the business scale, especially having regard to its people, technology and processes?
Bolt on acquisitions often add a lot of value. Does the business have a good track record of making and successfully integrating acquisitions? (if so, a bonus)

Tips for Sellers:

Growth of digitisation and platforms

Percentage of buyers using talent platforms increased from 14% in 2020 to 22% in 2021. A further 47% of buyers expect to use a talent platform within the next 2 years*
Total market for talent platforms is now approx. $15bn. Compound annual growth rate of 21%*
Convergence—tech staffing models increasingly looking like traditional staffing companies and vice versa
‘Platform when you want it; people when you don’t’ (Upwork website)
Role of recruiters changing—tech is taking away many of the more mundane tasks and allowing recruiters to focus exclusively on account management and recruitment
The ‘network effect’ is important—some of the larger platforms have limited sales and marketing departments because so much comes through peer referrals

Platforms and M&A

Platforms buying traditional staffing companies—accelerate client acquisition
Staffing companies buying platforms—cost saving; streamline procedures; more advanced client offering
Are there now too many platforms—-opportunities for tech consolidation?

*Source: SIA presentation / research presented at SIA Executive Forum 2022

Huge Talent Shortage

All stats point towards a chronic shortage of talent
9m people left their jobs in the USA in December 21—a 31% increase on 2020. There were 4.7m more job openings in the USA than hires in December 21*
Some evidence that the ‘Great Resignation’ may also be the ‘Great Retirement’*
The talent shortage is helping staffing companies move up the value chain and become trusted partners—end users need them more than ever to address talent shortages
Shortage of talent presents opportunities to make workers more productive (e.g. through training—so ‘train then deploy’ may grow further in popularity)

Addressing receptiveness to flexible working

‘There isn’t a worldwide shortage of talent…it just isn’t always located where you’d ideally like it to be.’
Strong evidence that remote working is here to stay, not just a blip. A recent SIA study (large sample size) showed that 48% of internal workers would prefer total remote working—ie never going into the office*
31% of internal staff said they would take a pay cut if it allowed them to work remotely anywhere*
Staffing companies expect an at least 10 fold increase in remote working for temporary workers in the USA—(2% to at least 20%)*
Remote working for temporary workers also leading to less measuring inputs (time sheets etc) and more focus on results (.i.e. increasing trend towards SOW mandates)
Those companies which address hybrid/remote working and globalisation will be more attractive M&A targets

*Source: SIA presentation / research presented at SIA Executive Forum 2022

How to make sure new business models do have capital value

Growth of new business models

Supply chain risk issues

Remote working – deploy overseas workers
Use of PEO and employer of record models – lack of certainty/unregulated/unlawful in some cases
Permanent establishment risk – VAT and corporation tax
Local licensing problems, for buyer if not seller
Use of remote deployment
Use of PEO and employer of record models – lack of certainty/unregulated/unlawful in some cases
Permanent establishment risk – VAT and corporation tax
Local licensing problems, for buyer if not seller
+ Right to work/Brexit
UK – concerns of investors’ advisers given increased HMRC interest in staffing supply chains
2021-2022 call for evidence about umbrellas – government believe there is tax fraud – CFA liability (unlimited fine)
Use of sole trader models – burden of proof on staffing co to “show” no sdc – HMRC beginning to take action
IR35 – end of honeymoon period – assessments and fines affecting Ministry of Justice etc even though they used checking tool
MSC risk for umbrellas and others
[NMW]
No interest in what is “normal market practice”