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
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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
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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
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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
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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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2004
af
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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
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Te eica
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Ge
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yH
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EPIX Deal
Am
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Te
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Pr
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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
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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
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Value from Fund's Perspective
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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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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
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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%)
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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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