2013 was a year of change in M&A for recruitment businesses and potentially pivotal for 2014 and beyond. In football parlance, 2013 could be described as a year “of two halves.”
For several years the M&A markets have been depressed, which was entirely reflective of the general state of the economy and in general, performance of recruitment businesses which experienced extended periods of highly challenging market conditions. A combination of two factors — low interest rates enabling businesses to service debt and HMRC (Her Majesty’s Revenue and Customs) responding to political pressure to agree time to pay agreements — resulted in far fewer business closures than might have been anticipated.
In these market conditions, the lack of M&A activity can be attributed to three principal factors:
1. Potential acquirers concentrating more on maintaining their own businesses
2. An absence of confidence in future markets preventing acquirers from investing
3. Depressed valuations discouraging potential vendors from selling
For a period of time in the darkest days of the recession, only distressed deals were being completed.
Following some significant private equity (PE) deals in 2012, notably Fircroft and Air Energi, the hope was that this would kickstart M&A activity in the SME and midsize deal markets. PE investing in the sector was viewed as a sign of confidence in the medium term outlook, although perhaps specifically in the energy markets.
In truth, little changed in the first half of 2013 and there remained a scarcity of deals, with trade buyers slow to follow PE’s lead. Given that U.K. trade buyers tend to account for the majority of U.K. recruitment sales, this was not helpful. Even in June when two plcs (Idox, which we advised, and Work Group) disposed of non-core recruitment businesses; a non-recruitment plc and PE were the buyers.
Nevertheless, at this point sentiment was improving and I am on record as stating “Based on our discussions with U.K. companies, other professionals and some overseas recruitment businesses looking to the U.K. there is likely to be an upswing in activity levels.”
The second half of 2013 saw a number of deals complete. Some of these were small private transactions but more significantly, the likes of Matchtech and InterQuest completed acquisitions. To me, this is a significant signal to the market and I believe that confidence has improved amongst vendors that they will be able to sell businesses in 2014 at reasonable valuations.
PREMIUM CONTENT: European Mergers & Acquisitions 2013
That last phrase “reasonable valuations” might be perceived as a broad generalisation and potentially frustrating to owners who would like some guidance on the type of valuation they might be able to achieve. My response is that there are so many factors that influence valuations that it would be dangerous and potentially misleading for me to quote a “typical” multiple for privately owned businesses, but I am happy to confirm that valuations are definitely rising and I expect to see this trend continue throughout 2014.
We believe that we will see some catch-up consolidation in 2014. The relatively low level of M&A in the recent years means that increased consolidation would simply be a move towards equalising the average levels of consolidation. This is not therefore a new phenomenon, just a return to equilibrium in the market as vendors who have had their exit plans delayed are now able to realise an acceptable value for their businesses.
The ongoing lack of availability of debt will present challenges to some businesses which might otherwise be more acquisitive. Unfortunately, we are not seeing any indications that this is about to change, despite rhetoric from the banks which seems to contradict the reality.
The M&A market, like any other, follows the rule of supply and demand. We believe there are many businesses with ambitions to acquire in 2014 and a healthy level of owners ready to exit. This combination should result in a steady level of M&A activity throughout the year, which in turn should continue to drive valuations upward.
For more information on M&A activity in Europe, please see Staffing Industry Analysts’ recent report, available to members here.
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