RESILIENT LEVELS OF M&A DESPITE PREDICTED DROP OF £1.4BN IN RECRUITMENT INDUSTRY
A new report from Catalyst Corporate Finance, predicts that the recruitment industry will see resilient levels of M&A activity in 2008 and 2009 on the back of significant transaction activity in 2007, during which the value of completed deals exceeded £720 million. The report also shows that this resilience will be against the backdrop of a sharp decline in aggregate industry turnover expected over the next two years, forecasting that industry turnover will decline to £26.3bn in 2008 and will continue to fall to £25.3bn in 2009, representing a drop of at least £1.4bn (5%) from 2007’s peak.
The recruitment industry has historically been exposed to pronounced cyclical swings and 2008/2009 will be no exception, albeit softer than previous downturns such as the one in 2001. These forecasts are based on the historic correlation between levels of GDP growth and recruitment industry turnover growth.
Mark Wilson, research director at Catalyst Corporate Finance, said: “The recruitment industry is driven by labour demand which is directly affected by GDP growth. Consequently when GDP growth slows, to two per cent in 2008 and below this in 2009, the recruitment industry will be affected. We estimate that when GDP growth dips below around 2.2% then aggregate recruitment turnover reduces. We are already seeing significant contraction in the City, where tens of thousands of jobs are expected to go this year alone, albeit exacerbated by the fall out from the credit crunch.”
Other findings from the report include the expectation that the temporary recruitment market will fare better than the permanent market which has already slowed, although those recruitment firms operating at the low added-value end of the market, such as in blue-collar and clerical sectors, are likely to face tougher conditions regardless of the contract type.
Despite the weakening economy and fall in public company valuations, Catalyst expects a resilient level of recruitment M&A activity in 2008. Buyers will continue to seek to diversify by sector and by geography or to consolidate their existing markets. International and local players in the UK recruitment market have over £650m in cash available to fund acquisitions. This is likely to involve the acquisition of higher quality businesses which are proving their strength despite the difficult trading conditions.
The report provides a review of the M&A activity during the last three years across the whole of the UK recruitment industry and shows how certain occupational sectors such as Healthcare have been through periods of consolidation. The research also predicts that certain occupational sectors will command valuation premiums due to structural market factors. The Engineering and Technical sector for example will remain strong due to an ongoing shortage of qualified engineers and technical staff and the international nature of demand.
Average transaction values in recruitment have increased by 80% since 2005 to £18 million in 2007, fuelled in part by greater competition for acquisitions and by the preference of Private Equity buyers for larger deals, targeting mature and stable recruitment businesses which have already achieved scale. Catalyst predicts lower levels of Private Equity appetite for investments in 2008 and 2009 due to restricted debt funding and vendor price expectations which are higher than market valuations. Private Equity is expected to continue to ‘exit’ investments where their performance is robust and where they can realise an attractive return on an investment.
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