WHEELING & DEALING
What Were They Thinking?
By Jean-Marc Levy

First published in HRO Today (May 2004)
 

Strategic deals are indicators of true M&A activity.
 

According to many, the tell-tale signs of a rebound in U.S. M&A activity are difficult to ignore. For the past few months, business analysts and commentators have pointed in unison to a robust build-up in M&A volume, confirming a surge in activity to which I had already begun alerting the readers of this column last September.

However, according to FactSet Mergerstat, deal activity data collected through the first quarter of 2004 tells a slightly different story. While mega-merger activity, involving deals valued at $1 billion or more, was very strong in early 2004, the mid-market segment, in which most human capital deals tend to cluster, had a lukewarm quarter, particularly when compared to the last quarter of 2003.

Short-term spike or widespread improvement: what is the true outlook for deal-making activity in the human capital segment?

One test of whether an M&A recovery is widespread and sustainable is what I like to call the “What Were They Thinking?” test. My theory is that even in the toughest economic times, businesses find ways to make acquisitions aimed at acquiring customers, broadening geographical coverage, gaining scale or achieving operating efficiencies in their core businesses, but that the true sign of a widespread recovery is the resurgence of “strategic” acquisitions, as companies look to enter new or adjacent strategic spaces, or to make bolder strategic moves in an attempt to reinvent themselves.

The initial reaction to reading announcements about strategic acquisitions can be a temporary bout of quizzical head-scratching. Upon closer review, however, these transactions often reflect a level of strategic vision or experimentation that is not typical of most companies while they are focused on navigating tough economic times.

Two recent human capital transactions, illustrate the kind of strategic thinking I am talking about::

• Manpower - Right Management

Back in December, when Manpower announced that it would spend $488 million to acquire Right Management Consulting, puzzled skeptics wondered what types of synergies, if any, the second largest provider of temporary staffing in the world could hope to generate from the purchase of an outplacement consulting firm with a culture and service offering so far removed from Manpower’s.

The answer to this very good question: not that many. Upon closer observation, however, with this acquisition, Manpower gained an overnight leading position in the outplacement segment, balanced its cyclical staffing revenue with counter-cyclical outplacement revenue, and is now positioned to make some progress towards its stated goal of improving overall margins with the addition of higher-margin outplacement services to its product mix.

Many corporate acquirers would justify making an acquisition on the basis of one of the above potential benefits alone.

• Monster Worldwide - Military Advantage

Why would global career solutions provider Monster Worldwide be interested in paying $40 million for the operator of military.com, a portal whose self-described goal is “to serve, connect, and inform the 30 million Americans with military affinity"?

Well, for one thing, the acquisition provides Monster with immediate access to 30 million job seekers in the public sector, where Monster has become an increasingly important player. And while there are few operating synergies between military.com and Monster, Military Advantage is believed to be a profitable affinity portal with double digit operating margins, making the transaction an accretive one for Monster.

Once again, what may have been a bit of a head-scratcher to the casual observer actually makes much sense to me.

As 2004 continues to unfold, I plan on staying on the lookout for "What Were They Thinking?" strategic transactions. Not only do they often lead to "copycat" deals, but they are also real indicators of the true health of an industry's deal-making activity.