WHEELING & DEALING
The HR Snoops Have Arrived
By Jean-Marc Levy

First published in HRO Today (January-February 2003)
 

In the new world of increased vigilance and fear, HR credential and background check services have finally come of age.

In an age when the CEOs of the bluest of blue-chip corporations can be exposed on the six-o'clock news for defrauding their companies or for lying on their resumes about their business and academic credentials, corporation boards, HR managers, and staffing companies alike are devoting significantly more time and resources to employee-screening activities.

At a time when businesses continue to spend considerable portions of their IT budgets on firewalls and other IT-security expenditures, they are also becoming increasingly aware of their growing vulnerability to acts of cyber-fraud or cyber-terrorism potentially caused by their own employees.

In the post-Enron days and in the post-September 11th world of increased vigilance and fear, HR credential and background check services have finally come of age as a major segment of the HR Outsourcing industry, and we expect this extremely fragmented $3 billion to $5 billion segment of the industry to continue growing at a very healthy double-digit annual clip in the years to come.

As the readers of this column have come to appreciate, these attractive fundamental trends, layered over a fragmented market landscape, translate, of course, into a very active level of M&A and investment activity in the sector.

It should come as no surprise that one of the leaders in the field, ChoicePoint, has made more than 25 acquisitions in this sector in the past five years alone, assembling a broad array of services and offerings such as employee-screening services, public record searches, drug and alcohol-testing services, DNA-identification services, and full-service background investigations.
 

NOTABLE TRANSACTIONS

First American Corporation was another active player in the employee-screening space in the last few months of 2002. They snapped up Employee Health Programs, one of the largest independently owned drug-testing management and medical-review services provider, for its HireCheck subsidiary, and rounding up the offering built around the acquisitions of American Driving Records and of several regional employment screening companies over the past couple of years.

More recently, in December, private-equity heavyweight Welsh Carson announced a bid to acquire US Investigations Services, the large nationwide employee-screening business, for $1.1 billion in one of the largest transactions the sector has seen to date. Earlier this year, US Investigations Services itself signed an agreement to purchase Total Information Services, a pre-employment screening business owned by the private equity affiliate of New York merchant bank Veronis Suhler, for $245 million.
 

DEAL-MAKER OF THE MONTH

The acquisition of US Investigations Services would only represent the confirmation of a continued focus on HR Outsourcing and Information Services for the private equity firm Welsh, Carson, Anderson & Stowe. This transaction comes right on the heels of the recently announced merger of eBenX and SHPS (a Welsh Carson portfolio company since 2000). The combined organization, operating under the SHPS name, will make Welsh Carson the owner of one of the largest providers of outsourced employee benefits and health-care management services, providing these services for approximately 20 million employees in over 800 large and midsize companies.

Welsh Carson, one of the oldest and largest private equity firms in the U.S., has invested in over 200 companies and has funded more than 650 follow-on acquisitions in its core industries (information services, telecommunications, and health care) since its inception in 1979.

In the past few years, in addition to its investment in SHPS, Welsh Carson has made several sizable investments in HR Outsourcing providers such as Onward Healthcare, a provider of travel and temporary health-care staffing services; Concentra, a managed-care workers' compensation services provider; and Amerisafe, a leading workers' compensation insurance company.

Given the likely current lackluster performance of Welsh Carson's telecom portfolio, it is a pretty safe guess to expect a continued focus on HR Outsourcing investments from this private equity firm.