Transcript Slide 1
Today's Merger & Acquisition
Environment for PEOs
John R. Hammett
Managing Director, Head of M&A
Cherry Tree Securities
Topics
Historical Transactions
Factors Driving M&A Among PEOs
Valuation Trends
Private Equity Buyers
Key Take-Aways
© Cherry Tree Securities
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History
Trend in PEO Deals
Number of Deals
Number of PEO Deals
18
16
14
12
10
8
6
4
2
0
1998
© Cherry Tree Securities
1999
2000
2001
2002
2003
2004
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Trend in PEO Deals
Number of Deals
Number of PEO Deals
18
16
14
12
10
8
6
4
2
0
1998
© Cherry Tree Securities
1999
2000
2001
2002
2003
2004
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Trend in PEO Deals
Number of Deals
Number of PEO Deals
18
16
14
12
10
8
6
4
2
0
1998
© Cherry Tree Securities
1999
2000
2001
2002
2003
2004
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Trend in PEO Deals
Number of Deals
Number of PEO Deals
18
16
14
12
10
8
6
4
2
0
1998
© Cherry Tree Securities
1999
2000
2001
2002
2003
2004
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Three Significant Activities
TeamAmerica – VSource deal falls apart
Gevity HR buys
•
Remnants of TeamAmerica
• TeamStaff
• EPIX
Two new announced acquirers:
• PML North America
• Encore Professional Employers
© Cherry Tree Securities
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Who's Merging?
Date Seller
Type of Business
Buyer
Type
Date Seller
Type of Business
Buyer
Type
Sep-04 InSource Business Strategies
Regional outsourced HR
Encore Professional Employers
Strategic
Feb-03 Advanco
Regional PEO
Workforce Solutions
Strategic
Aug-04 Carolina Professional Employers
Regional PEO
Encore Professional Employers
Strategic
Feb-03 Accord Human Resources, Inc.
Regional PEO
Imaging Technologies
Strategic
Jun-04 Pacel Corporation
National PEO
Investment by Compass Group
Financial
Dec-02 National Employment Alternatives
Regional PEO
Trident Systems
Strategic
May-04 YourStaff Solutions
Regional PEO
Pacel Corporation
Strategic
Dec-02 Undisclosed PEO
Regional PEO
Pacel Corporation
Strategic
Mar-04 EPIX
National PEO
Gevity HR
Strategic
Nov-02 StaffAmerica
National PEO
The Cura Group
Strategic
Nov-04 TeamAmerica (bankruptcy)
National PEO
Gevity HR
Strategic
Oct-02 BeneCorp Business Services
Regional PEO
Pacel Corporation
Strategic
Nov-03 TeamStaff
National PEO
Gevity HR
Strategic
Oct-02 Aampro Group, Inc.
Regional PEO
Trident Systems
Strategic
Sep-04 Gevity HR
National PEO
Investment by Frontenac
Financial
Sep-02 Advantage Payroll Services
Payroll Services
Paychex
Strategic
Sep-03 E3 Group
Regional PEO
TriNet
Strategic
Sep-02 Undisclosed PEO
Regional PEO
Pacel Corporation
Strategic
Jun-03 Advantage Enterprises
Regional PEO
Pacel Corporation
Strategic
Sep-02 Undisclosed PEO
Regional PEO
Pacel Corporation
Strategic
Jun-03 American HR (Certified Svcs.)
Regional PEO
StaffAmerica
Strategic
Aug-02 PEO-USA
Regional PEO
The Nelco Companies
Strategic
Jun-03 ProBusiness Services
Outsouced HR
ADP
Strategic
Jul-02 Meridian
Regional PEO
StaffAmerica
Strategic
Jun-03 Advantage Enterprises
Regional PEO
Pacel Corporation
Strategic
Mar-02 The Frick Company
Regional Outsourced HR
TALX Corporation
Strategic
Jun-03 World Wide Personnel Services
Regional PEO
PML North America
Strategic
Mar-02 Enstructure, Inc.
Regional PEO
Imaging Technologies
Strategic
Jun-03 United Personnel Services of Maine Regional PEO
PML North America
Strategic
Mar-02 Group 4
Regional PEO
TEAM Mucho
Strategic
May-03 Asmara, Inc.
Regional PEO
Pacel Corporation
Strategic
Feb-02 Inovis
Regional PEO
TEAM Mucho
Strategic
Apr-03 HealthStaff International
Regional PEO
Aampro Group, Inc.
Strategic
Feb-02 Strategic Staff Management
Regional PEO
TEAM Mucho
Strategic
Apr-03 Advantage Employer Services
Regional PEO
The Nelco Companies
Strategic
Jan-02 Corporate Staffing Concepts
Regional PEO
Team Staff
Strategic
Mar-03 Minority investment in Gevity HR
National PEO
Frontenac Private Equity
Financial
Jan-02 Amfinity Business Solutions
Regional PEO
Presidion Solutions
Strategic
Mar-03 Undisclosed PEO
Regional PEO
Nelco
Strategic
Mar-03 Interpay, Inc
Payroll Services
Paychex
Strategic
Feb-03 MediaBus Net (reverse merger)
Public Shell
Presidion Solutions
Financial
© Cherry Tree Securities
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M&A Drivers
PEO History From
a Dealmaker's Perspective
Start-up & rapid expansion phase:
Low-cost of entry
Powerful business model
Unpenetrated markets
Insurance arbitrage promised profits
Easy insurance market
© Cherry Tree Securities
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PEO History from
a Dealmaker's Perspective
Health-insurance wave:
Tempting self-insurance margins lead to exposure
that kills many PEOs
Or drives them to merge with others
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PEO History from
a Dealmaker's Perspective
Workers' Comp Wave I
Tempting self-insurance margins lead to exposure
that kills many PEOs
Or drives them to merge with others
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PEO History from
a Dealmaker's Perspective
Workers' Comp Wave II:
Major comp insurers pull out of PEO
underwriting
Kills more PEOs
Or drives them to merge with others
Or drives them to seek stronger financial partners
© Cherry Tree Securities
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PEO History from
a Dealmaker's Perspective
Scale and Specialty-Driven Phase
Economies of scale favor larger PEOs
Workforce specialization drives higher margin
• Medical – technical – professional specialists
• Traditional labor specialists with industry
concentration
Winners will be big regional, national, and
specialist firms
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Valuation
Valuation Trends
Definitions:
Enterprise Value (EV) (value without regard to debt, equity, or cash)
= Market Capitalization (equity), plus debt, minus cash
EBITDA (approximate cash flow before financing or taxes)
= Earnings before interest, taxes, depreciation, amortization
EV/EBITDA = price or value / earnings
EV/WSE = price or value per Worksite Employee
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EV/EBITDA Trends
Company Value Trends
16.00
Value to Earnings (EBITDA)
14.00
12.00
10.00
2003
8.00
2004
6.00
4.00
2.00
0.00
Administaff
© Cherry Tree Securities
Presidion
Gevity HR
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EV/WSE Trends
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
-
2003
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es
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af
f
2004
af
f
Value
Enterprise Value per Worksite Employee
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Valuation Trends
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
-
2003
2004
Team Staff Deal
r
Te eica
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St
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Ge
vi t
yH
R
EPIX Deal
Am
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Te
am
Pr
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Ad
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Deal
Range
af
f
Value
Enterprise Value per Worksite Employee
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Valuation Trends
Gevity Deal Price
per Worksite Employee
$1,250
$1,000
$750
$500
$250
$0
TeamAmerica
© Cherry Tree Securities
TeamStaff
EPIX
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Today – 3 Markets
Strategic – high value
Publics valuation range ~ $3,000 / WSE
Buying strong PEOs at ~ $1,000 / WSE
at or below 4 to 6 times EBITDA
Strategic – bottom feeder
Large, medium, & small buying weak PEOs cheaply
Private Equity Firms (financial buyers)
Buying at 4 to 6+ times EBITDA
© Cherry Tree Securities
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Private Equity Demystified
Private Equity Firms
Invest from a fund of capital
From $50 million to $ billions
Raised from insurance companies, pension funds,
endowments, wealthy individuals
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Private Equity Firms
Today: over $100 billion in uninvested capital
We estimate about 1,500 to 1,800 funds in USA
Cherry Tree tracks about 900 of them
• Industry specialists
• Generalists
• Deal size ranges
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Value from Fund's Perspective
Value = expected total cash return
Over an expected holding period of 3 to 7 years
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Value from Fund's Perspective
© Cherry Tree Securities
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Value from Fund's Perspective
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Value from Fund's Perspective
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Value from Fund's Perspective
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Private Equity Value Drivers
Predictability of future cash flows
Strong management that will stay (for awhile)
Demonstrated operating history of earnings
Growth potential
Demonstrated historical growth
Strong industry and macro growth trends
Ability to grow without working capital or physical assets
Exit opportunity
Strategic or bigger financial buyer willing and able to buy
Or an IPO
© Cherry Tree Securities
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Private Equity Deal Structure
Objective: match price and payments to
minimize risk
Portion in cash
Portion in subordinated notes
• (seller or institution)
Portion in share of future earnings (earn-out)
Re-invested equity from sellers (10% to 40%)
© Cherry Tree Securities
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Private Equity Triage
To private equity firms, you are either:
1. A platform
2. A tuck-in
3. Or an Exit
© Cherry Tree Securities
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Key Take-Aways
Key Take-Aways
1.
PEO is an active M&A marketplace
2.
Macro trends are continuing to drive consolidation
3.
4.
5.
Deals are fewer, but quality is better
Small firms can't get the insurance at a good price; service demands are
increasing
Economies and service capabilities of larger firms drive their value higher
than smaller ones
Owners need to be either a buyer or a seller in the next 3 years
Strategics will buy at the bottom – or in the middle of the range
Certain Financial buyers will buy profitable PEOs if they believe
in management, growth, and an exit
© Cherry Tree Securities
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Prepared by:
John R. Hammett
Managing Director, Head of M&A
Cherry Tree Securities
301 Carlson Parkway
Minnetonka, Minnesota 55305
952-893-9012
© Cherry tree Securities, LLC all rights reserved
© Cherry Tree Securities
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