WHEELING & DEALING
Back To Staffing?
By Jean-Marc Levy

First published in HRO Today (April 2003)
 

With a severe labor shortage in the cards, this currently undervalued sector is beginning to warm up.

The greatest labor shortage in the history of American industry is only a few years away. This may be hard to believe as the country’s bruised economy struggles out of a recession and into what some fear may become a jobless recovery, but the key trends and fundamentals squarely support this prediction.

According to labor market experts, the U.S. economy is expected to add over 20 million new jobs in the next decade. In that same time frame, increasing numbers of aging baby-boomers will continue to leave the workforce, depleting labor participation pools much faster than they can be replenished with new arrivals. To aggravate matters, the Employment Policy Foundation, a non-profit research foundation focusing on workplace trends and policies, anticipates that the U.S. educational system won’t be able to meet the growing demand for skilled labor, and that within the next decade, as a result of significant shortfalls in the number of graduates with college degrees, the U.S. labor market will be 6 million new graduates short from meeting demand.

One would think that with such strong fundamental drivers, staffing and staffing-related businesses would be highly valued by long-term investors and strategic acquirers alike. Yet, after being the darlings of Wall Street at the peak of a war for talent fueled by the Internet economy, staffing businesses are currently at their most depressed valuations in many years. Publicly-traded staffing company stocks have actually managed to significantly underperform the S&P 500 in 2002, quite a feat considering that the index itself was down 22% for the year!

M&A and deal-making activity in the staffing sector is beginning to show some signs that the disconnect between long-term fundamentals and short-term valuations is finally beginning to attract some attention again. Acquisition activity in 2002 showed a modest improvement, primarily from large strategic buyers. According to a recent DeBellas & Co. report, five large publicly traded staffing players (Vedior, Adecco, ATC Healthcare, CGI Group, and Medical Staffing Network) accounted for 23% of 142 announced staffing transactions in 2002.

Early indications are that 2003 activity should actually improve again, particularly in the hottest sectors such as healthcare staffing. As more strategic buyers, roll-up companies, and private equity players slowly jump back into the staffing segment, we expect 2003 to be a very active time for staffing M&A.

Businesses and investors interested in playing in the staffing sector should not waste any time: the window will start closing soon on the low valuations that make acquisitions of staffing businesses as attractive as they are now.
 

NOTABLE TRANSACTIONS

In the first couple of months of 2003, venture capitalists and private equity investors dipped a cautious toe back into the human capital management space, perhaps an early sign that they too believe that the first glimmers of an economic recovery are on the horizon. The list of investors was quite diverse, and included Adena Ventures, Mountaineer Capital, Mid-Atlantic Venture Funds, Berkshire Partners, and the Carlyle Group.

These investors funded a broad cross-section of human capital management businesses such as Vested Health, a provider of consumer directed health care programs offered to consumers through employer groups; MindMatters Technologies, the developer of Innovator, a platform designed to help companies inspire, manage and protect developing innovations and intellectual capital assets; Acosta, a provider of outsourced sales, merchandising, marketing, and promotional services to consumer goods manufacturers; and Worldzen Holding Limited, an operations consulting and Business Process Outsourcing company.

While it’s way too early to call out a trend, let’s keep our fingers crossed and hope that these early investments are the precursors of a return of private money capital to the Human Capital space. We’ll keep you posted!