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US staffing sector set for year of M&A
February, 08th 2010

After a series of deals in recent weeks, 2010 is shaping up as the year of mergers and acquisitions in the fragmented US staffing industry.

Employment service companies Manpower Inc and Spherion Corp and jobs website Monster Worldwide Inc reached a trio of takeover deals worth almost USD 700 million over the past week, and industry executives said there could be more to come.

The reason? With the US economy showing signs of picking up after a two-year slump, staffing chief executives want to move quickly to snap up deals at bargain prices that could rise if the nation's nascent recovery accelerates.

News on Friday that the US unemployment dropped to a five-month low in January could reinforce the industry's belief that this is the time to buy.

"In 2010 and '11 you'll see more M&A," said Roy Krause, CEO at Spherion, which this week said it would buy Tatum LLC, a provider of interim executives in a USD 43 million cash-and-stock deal.

"We wanted to make sure the thing had turned before you go and commit yourself," he said on Friday. "You don't want to wait to start to acquire assets at the end of the recovery. By then prices go up and you'd miss the opportunity to leverage on the economy."

Spherion's move extends the Fort Lauderdale, Florida-based company's business further into higher-margin professional services rather than light industrial or clerical staffing.

That is a move that other players in the industry may follow, observers said.

WHITE-COLLAR SHIFT
The worst downturn the US economy has endured since the Great Depression has extended the temporary staffing industry's reach beyond its base of clerks and factory workers further into the white-collar domain.

That is because employers are looking to limit their fixed costs and workers -- who watched the unemployment rate surge to 10% at the end of last year -- are more willing to accept temporary positions than they once were.

"The secular churn within the economy is more into a professional white-collar type economy, moving away from goods-producing toward services," said Morningstar analyst Vishnu Lekraj, who said more deals may be coming.

"Right now they can get a good price that they couldn't get in the past, and you have the opening up of credit markets a little bit," Lekraj said.

Switzerland-based Adecco SA last month completed its USD 1.3 billion acquisition of professional staffing services company MPS Group Inc.

Manpower, which this week said it would buy technology staffing company Comsys IT Partners Inc for about USD 431 million, could make further US acquisitions, Lekraj said. He also named KForce Inc as a company with the cash and the appetite for deals.

'PLAYING OFFENSE'
Temporary hiring tends to rise at the beginning of recoveries, as employers look for a flexible way of adding capacity without committing to higher fixed costs. The percentage of temps in the total labor force rose to 1.52 percent last month from 1.33% in September.

The January jobs report also showed growth in professional payrolls. Staffing experts say fields including technology and healthcare are likely to lead the next, eventual wave of job creation, so companies like Manpower are getting ready.

"Technology is a leader in this economy," said Scot Melland, CEO of Dice Holdings Inc., who pointed to this week's earnings from Cisco Systems Inc., which trounced estimates.

A similar flurry of M&A activity followed the previous recession, said Melland, whose sites focus on technology and finance jobs.

"Most of these companies are looking forward rather than managing through a difficult time," Melland said about the spate of recent deals. "They're playing offense."

To be sure, not every deal is welcomed with champagne on Wall Street.

Dice's larger competitor, Monster, said this week it will pay USD 225 million in cash for Yahoo Inc.'s HotJobs.com, as Monster's CEO cited an improving economy.

But reaction to the deal, which included Monster being downgraded to "sell" by Deutsche Bank, suggested investors question the value of combining two generalists in the sector. Monster shares slumped as much as 21% the day after the deal was announced and were lower again on Friday.

"(Investors) are looking at this deal and wondering, 'Why do they think this makes sense?'" said Marc Cenedella, founder of TheLadders.com, a privately held competitor to Monster that specializes in six-figure jobs.

Cenedella said he expected recruiting firms to become more specialized. A specialized service is more useful to employers who want to examine fewer applicants and to job seekers who want content relevant to their skills.

 
 
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