Randstad Acquisition Frenzy… This Time in North America Acquiring SFN Group

A pretty big acquisition happened last week in the staffing and recruiting industry. Here is the backdrop.

On July 20, 2011, Randstad announced that it is going to acquire SFN Group to expand in North America. Randstad is headquartered in the Netherlands and SFN Group in the United States. It is a cash tender offer at $14 per share. Approved by both boards, the acquisition, now subject to regulatory approvals and a tender offer of at least 50% of SFN Group’s outstanding shares, equates to ~$771m. This is a premium of 53% over SFN Group’s closing share on July 19, 2011. The acquisition is expected to close in September 2011.

The Randstad Group will have combined revenues of ~$22bn / €17bn (pro forma as of March 31, 2011). In North America, the combined company will have $4.6bn in revenues (pro forma as of March 31, 2011) from the following service segments:

• 52% Staffing
• 39% Professionals
•   9% HR Services including payroll, managed services, and RPO.

Randstad, who already has sizeable revenue in North America, now becomes a major force. Randstad, which had full year 2010 revenues of €14,179m, obtained 13% of its revenues (or €1,848m) from North America, which equates to over $2.6Bn. The SFN Group had full full year revenues of $2,053m. Approximately 80% of Randstad’s 2010 revenues were in Europe.

So, is Randstad trying to conquer the staffing world via acquisitions? Its last acquisition was in August 2010, acquiring FujiStaff Holdings to strengthen its presence in the Japanese staffing market. Since 2006, Randstad has merged and partnered with five other companies in Japan to provide staffing services that include temporary and permanent hires, contract staffing, and internal recruiting for industries that include healthcare, real estate, and construction. Since 2005, Randstad has been acquisitive elsewhere  in growing its staffing business including in:

• U.K.
• Germany (3)
• Netherlands
• China
• Switzerland.

Randstad now also picks up SourceRight Solutions’ RPO business, which NelsonHall estimated as the third largest RPO provider in North America in its 2011 RPO market analysis report. SourceRight’s RPO business has had significant year-over year revenue growth in H1 2011. Its RPO business has primarily been in North America, but expect for it to expand into Europe by 2012. More to follow in a future blog…

Gary Bragar,  HR Outsourcing Research Director, NelsonHall

Compensation – a Critical Component of Performance Management (and a Process Ripe for HRO)

Let’s cut to the chase here. While compensation is not always the primary reason people change jobs, I think we’ll all agree we should be appropriately compensated for the work we do. And while it can be challenging and time-consuming for companies to find the data they need to determine market- and role-appropriate salaries, not doing so can lead to loss of top talent. This issue came top of mind to me because of two occurrences this week.

First, Kenexa on September 1 acquired Salary.com for approximately $80 million. Kenexa provides talent management services including RPO and performance management – both software and advisory services – and additional talent management services that help improve employee engagement and retention. In addition, Kenexa’s 2X Perform Platform (which will be available H2 2010) will contain performance managment components including goal setting, appraisals, succession planning and compensation management. Salary.com provides compensation software and content. In addition, it has a database of compensation information across thousands of job positions. The acquisition of Salary.com not only enhances Kenexa’s ability to provide compensation management; having Salary.com’s benchmark database will enable Kenexa to help its clients ensure they are paying their employees market-competitive salaries to aid in talent retention. 

Second, on its September 1 analyst briefing upon completion of its acquisition of Workscape, ADP not only spoke about the merits of Workscape’s benefits administration capability, including health and welfare, but also about the importance of Workscape’s talent management capability, notably its compensation planner. ADP today provides performance management services including succession management and learning management, in part via its partnership with Cornerstone OnDemand, With its acquisition of Workscape, ADP has added compensation management to its performance management offerings portfolio.

The importance and impact of compensation as an integral component of performance management cannot be underestimated. While supervisors are, and will continue to be, ultimately responsible for performance management, including compensation, they need the right tools, technology and insights to effectively do the job. HRO providers that offer the full mix of performance management capabilities – robust tools and technologies, as well as advisory services – are best positioned to support their clients performance management needs. And there is definitely opportunity for growth in this space. According to NelsonHall’s June 2010, “HRO Issues and Opportunities” report, only one-third of buy-side executives have outsourced compensation administration, and it is the second least outsourced service/component of multi-process HRO deals.

My advice? Providers, beef up your compensation management offerings, either organically or via partnerships or acquisitions. And buyers, evaluate your current compensation management capabilities. If they fall short, either due to lack of insights or resources, consider engaging the services of an HRO provider with expertise in this process. You have everything to gain by ensuring talent retention through the right compensation plans.

Gary Bragar, Senior HR Outsourcing Analyst, NelsonHall

HRO’s Summer Gets Hotter – Aon to Acquire Hewitt

July is one of hottest months of the year in many areas, and it just got hotter as the trend to bulk up in benefits continues with Aon Corporation to acquire Hewitt Associates for $4.9 billion.

The combination of Aon Consulting and Hewitt will be renamed Aon Hewitt. Russ Fradin, Hewitt’s current head, will serve as chairman and CEO of the new unit, and will report directly to Aon’s CEO, Greg Case. The transaction is expected to close in November after achieving the required approvals.

Once closed, the new Aon Hewitt will become the largest human capital consulting and benefits outsourcing services provider, moving ahead of Towers Watson and Mercer. The new mega-player will start out with a combined $4.3 billion in revenues, 29,000 associates and offices in 120 countries worldwide.

The acquisition will almost triple the size of the company’s Aon Consulting unit, which generated $1.3 billion in revenues in fiscal year 2009 compared to Hewitt’s $3.0 billion. The blended revenue mix, using 2009 data, is 49 percent consulting services, 40 percent benefits outsourcing, and 11 percent from HRO. Separately, consulting revenues were about the same for both companies, at about $1 billion. Eighty-five percent of Aon’s revenue comes from consulting, with the balance from benefits outsourcing. At Hewitt, consulting contributes 33 percent of revenues, with 51 percent coming from benefits outsourcing and 16 percent from multi-process HRO.

Other than multi-process HRO, both companies have similar offering line-ups in human capital health, retirement, investment, compensation and benefits consulting and benefits outsourcing. Hewitt’s focus has been large corporate clients, and Aon Consulting has a large base of middle market clients, which will help reduce overlap. Both also offer talent management services, with Aon more focused on its U.S. practice and Hewitt on providing global services.

Hewitt continues to offer multi-process HRO, and is currently supporting approximately 700,000 participants with $480 million in revenues. After stemming several years of outsourcing unit losses after its acquisition of Exult, Hewitt has returned to acquiring new business, winning both renewals and several new contracts to date in 2010. Hopefully Aon, which offers RPO services but had stopped competing for multi-process HRO deals, will support Hewitt’s current intention to remain a major player in the comprehensive HRO market. We want employers looking to outsource multiple processes to a primary vendor to have a prime set of robust choices.

Due to the major changes and uncertainties in the U.S. market due to the Health Care Reform Act, there will be heightened opportunities for consulting, outsourcing and brokerage of employee insurance plans. Also, understanding and rationalizing employee benefits, compensation and talent management are growth areas for multi-country companies as addressing economic pressures will remain a top priority for the near future.

Ultimately, the point of mergers and acquisitions is growth, and the longer term value of the Aon Hewitt deal is in the global scale and scope of the combined entity and the opportunity to cross sell into each other’s base.

Aon Hewitt will be well-positioned to compete in the middle and large markets around the world for a full range of human capital services from consulting to outsourcing, investments and insurance. HRO’s summer just got hotter, and the summer is far from over!

Linda Merritt, Research Director, HRO, NelsonHall

HRO Holiday Gifting

What do you get the company that is hard to buy for? How about a new niche acquisition? As we ready for the holiday season and the end of the year, I wonder if there will be any interesting, prettily wrapped presents. If you are shopping to buy or sell all or a portion of an HRO business, here are a few gift buying guide pointers.   

Look at the Bow on the Package

Attractive acquisition factors:

•  State-of-the-art technology infrastructure with low operating costs and great end-user experience

•  Integrated service centers in desirable locations, good regional coverage for languages, deep subject matter expertise and knowledge of local regulations

•  Reputation for service quality and relationships

•  Compatibility in values and culture

•  A well-rounded book of current clients

•  Strong revenue stream with a high percentage of multiyear contracts

•  No/low debt

•  Small enough to be affordable and benefit from the leverage of a larger partner

Shake the Package

While the above characteristics are the ideal, it’s much more likely a potential acquisition candidate will have a mix of elements, some more attractive, some not so much.

Extra due diligence is required if the main asset is a current slate of contracts. If the potential acquisition is friendly, take a look at the customer termination clauses to see if there are easy outs. Larger clients often have Change in Control terms that work both ways, including covering what happens if the provider is acquired. Check the penalties for Termination for Convenience. If the penalties decline over time, how near end of term are the largest clients? Are there signs some of the major clients are already on their way out the door?

Last April, Empyrean Benefits Solutions, Inc. made a bid to acquire ING’s Health and Welfare Unit. By June the deal was dead. According to my information, a key to the deal was keeping the majority of the clients intact as Empyrean already had its own new technology platform. When it became increasingly clear that the full book of clients would likely not be retained, the deal fell apart. As a result, Empyrean decided to stay focused on its own organic growth path. (Which, by the way, Empyrean has successfully done, almost doubling its client base by adding 14 new clients so far this year.)

There are providers looking for the right acquisition, and there are those who would like to sell. A match in the HRO space requires the same level of mutual due diligence required in a major provider and client long term contract. A match in the HRO community is also a matter of attractive elements and compatibility.

Happy holiday due diligence and gifting.

Linda Merritt, Research Director, HRO, NelsonHall

The Places We Will Go to Grow HRO

The players in the multi-process HRO field have been changing. As we ready for economic recovery, will there be new entrants? Who is leaving? Who is for sale? And who is on the hunt for an acquisition?

As we have at least a few minutes before the recovery takes off, let’s have a little fun speculating.

Tidbits

I recently interviewed several of the new India-based HRO provider entrants. Each said that while they were not explicitly looking for acquisitions they would consider the “right opportunities.”

The United States remains the largest market for HRO, and there is more than one non-U.S. based player looking to grow business in the U.S.

The Economic Times reported this week that Infosys BPO CEO Amitabh Chaudhry talked to reporters on the sidelines of the World Economic Forum in New Delhi, India. While Infosys already has eight delivery centers around the globe, including in Mexico, it does not have one in the U.S. According to the press coverage, Infosys BPO is reportedly planning to set up a new delivery center in the U. S. before the end of this financial year. In addition, “Infosys also said it is eyeing acquisitions worth USD 50-200 million in areas where the company has a small presence. ‘The acquisitions will be funded through cash in areas we have a small presence,’ Chaudhry said.”

While the above reported comments are about Infosys’ broader BPO, it is a safe leap to assume the interest is there to further expand its HR business as well.

Is NorthgateArinso also looking to expand its share of business in the U.S.?  If the two most recent new experienced executive hires are any indication, the answer is yes.  In September, Trey Campbell was brought aboard as President of the Americas. And in October, Troy Workman joined as VP of Service Delivery in the Americas.  

Trends

We have been seeing acquisitions and partnerships to fill out service and coverage footprints to provide expanded services to multi-national companies, and that activity will continue.

Growth into emerging markets is regularly predicted and will happen in due time.

Given the anticipation of a slower recovery in Europe, combined with its less mature HRO market, it is not likely to lead the way in growth.

So the U.S. will remain a growth target magnet for HRO, in everything from applications to discrete processes to multi-process HRO.

Are you a small-to medium-size niche HRO provider with state-of-the-art technology, specialty services with deep subject matter expertise or coverage in a desirable geography? Be ready to answer the knock of opportunity.

And buyers, good news. There are providers who want to be where you are and where you are going, whether it is in North America or around the world.

Linda Merritt, Research Director, HRO, NelsonHall

HRO Provider Acquisitions Heating Up

If you thought that pure-play HRO provider acquisitions were out of vogue – as compared to the recent flurry of M&A activity among broad-based BPO providers and technology-oriented companies, ala HP/EDS, Xerox/ACS – think again, per two significant acquisitions announced this week.

First, Adecco, headquartered in Switzerland, is acquiring U.S.-based MPS Group to strengthen its professional staffing services capabilities and expand its delivery footprint, especially in the U.K., Canada and the U.S. Under the terms of the agreement, Adecco will acquire MPS Group for €782m or $13.80 per share in a cash transaction, a 24 percent premium over the October 19, 2009 closing stock price. The acquisition is to be completed Q1 2010. MPS Group will bring to Adecco professional staffing services to businesses with functional focuses in IT, F&A, law, engineering, marketing and healthcare. This is all good for Adecco, its existing clients and potential buyers. It’s also good for employees of both companies as they will benefit from increased career opportunities.

This acquisition could also be a big boost for Adecco’s RPO business and its clients, as MPS Group has its own integrated talent management platform which includes recruitment, learning and performance management systems, as well as compensation management and succession planning. Our research demonstrates clients have shown increased demand for leveraging talent management platforms, both with RPO and other single line HRO services such as payroll.

This transaction makes good sense as it eliminates the two providers from fighting for the same customers, and $50 million of synergy savings gained by combining the companies is no small potatoes.

Second, NorthgateArinso has acquired Randstad HR’s payroll outsourcing division, CIAN, to strengthen its Dutch payroll outsourcing business. CIAN reported 12 million euro in revenue in the past year. Though small in comparison to Adecco’s purchase, this acquisition is still significant in strengthening NorthgateArinso’s position in the Netherlands. With Randstad deciding to exit the payroll business in the Netherlands, CIAN’s five large and 32 mid-sized clients will gain business continuity benefits by moving to a provider that remains committed to payroll outsourcing. CIAN employees will also benefit, as they will be working for a global provider of HR and payroll services, likely resulting in increased career opportunities within and outside of the Netherlands. This acquisition also makes sense as it strengthens NorthgateArinso’s employee base, enabling it to better service its clients, and adds additional clients to its portfolio.

In my analysis, these acquisitions signal two important HRO industry trends:

•  Acquisitions will continue to support geographic expansion and service delivery capabilities

•  Partnerships between HRO providers – which far outpaced acquisitions this year – will continue for the same reasons as acquisitions, such as access to better technology. But the partnerships will be more focused on areas in which the providers are not directly competing for the same customers, e.g., to service existing multi-country clients that have employees in a country they do not currently service when building that capability organically may not make sense if there is not enough scale of clients and employees to service

What do you think will happen in the HRO acquisitions and partnerships arena?

Gary Bragar, Lead HRO Analyst, NelsonHall

Managing Your Footprint – Welcome to the New Summer Time HRO Dance

Many HR outsourcing providers today are looking for ways to carefully manage their service footprint.  Under economic pressure, and with limited tolerance for capital investments, they are seeking cost-effective and risk-managed ways to leverage their service strengths and geographic coverage. As a result, we are seeing a new round of provider dance partners making selective divestitures, partnerships and acquisitions.

The Back Step: In a few cases, providers are back-stepping from some services and countries to focus on core strengths and growth geographies.

•  For example, in Europe, Randstad continues to sell parts of its salary administration and payroll services in the Netherlands while planning to carry on delivering these services in other countries where it has better growth prospects.

Two to Tango: In more cases we are seeing partnerships and alliances to leverage complementary service delivery strengths with an overall expanded geographic footprint.

•  In May, General Physics and Baker Communications entered into an agreement to increase their partnering in offering global corporate training and learning services.

•  Alexander Mann Solutions (AMS) has been leading the alliance dance this summer. It and Xchanging just announced their strategic alliance to deliver end-to-end HR services. And just two week ago, AMS and The RightThing announced their partnership to cover and expand multinational RPO services.

Take the Lead: Swinging across the dance floor from alliances and strategic partnerships and moving on to joint ventures can culminate in acquisitions.

•  Hewitt Associates has acquired the remaining interest in BodeHewitt AG & Co KG – a German pensions and benefits specialist – from its joint venture partner Bayerische Hypo- und Vereinsbank AG (HVB), with the business becoming Hewitt’s German Retirement and Financial Management (RFM) consulting practice.

•  Trinet just completed its acquisition of Gevity, further expanding its PEO geographic footprint and ability cover both the small business and midmarket.

Thank Your Partner: A good turn around the dance floor can lead to more business opportunity.

•  Adding to its dance card, Alexander Mann Solutions has signed a five year agreement to use new HRO partner Xchanging’s procurement outsourcing services.

The HR service provider partnering activity we are seeing looks like positive strategic moves for providers and buyers alike. But actually making partnerships of any nature work requires a lot of nurturing over a long period of time. We’ll see which of the summer time dance partnerships lead to long-term relationships.

Linda Merritt, Research Director, HRO, NelsonHall