Today's Merger & Acquisition Environment for PEOs John R. Hammett Managing Director, Head of M&A...

Today's Merger & Acquisition Environment for PEOs

John R. Hammett

Managing Director, Head of M&A

Cherry Tree Securities

© Cherry Tree Securities 2

Topics

Historical Transactions

Factors Driving M&A Among PEOs

Valuation Trends

Private Equity Buyers

Key Take-Aways

History


Trend in PEO Deals

Number of PEO Deals

02

46

810

1214

1618

1998 1999 2000 2001 2002 2003 2004

Nu

mb

er o

f D

eals


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


Who's Merging?

Date Seller Type of Business Buyer TypeSep-04 InSource Business Strategies Regional outsourced HR Encore Professional Employers Strategic

Aug-04 Carolina Professional Employers Regional PEO Encore Professional Employers Strategic

Jun-04 Pacel Corporation National PEO Investment by Compass Group Financial

May-04 YourStaff Solutions Regional PEO Pacel Corporation Strategic

Mar-04 EPIX National PEO Gevity HR Strategic

Nov-04 TeamAmerica (bankruptcy) National PEO Gevity HR Strategic

Nov-03 TeamStaff National PEO Gevity HR Strategic

Sep-04 Gevity HR National PEO Investment by Frontenac Financial

Sep-03 E3 Group Regional PEO TriNet Strategic

Jun-03 Advantage Enterprises Regional PEO Pacel Corporation Strategic

Jun-03 American HR (Certified Svcs.) Regional PEO StaffAmerica Strategic

Jun-03 ProBusiness Services Outsouced HR ADP Strategic

Jun-03 Advantage Enterprises Regional PEO Pacel Corporation Strategic

Jun-03 World Wide Personnel Services Regional PEO PML North America Strategic

Jun-03 United Personnel Services of Maine Regional PEO PML North America Strategic

May-03 Asmara, Inc. Regional PEO Pacel Corporation Strategic

Apr-03 HealthStaff International Regional PEO Aampro Group, Inc. Strategic

Apr-03 Advantage Employer Services Regional PEO The Nelco Companies Strategic

Mar-03 Minority investment in Gevity HR National PEO Frontenac Private Equity Financial

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

Date Seller Type of Business Buyer TypeFeb-03 Advanco Regional PEO Workforce Solutions Strategic

Feb-03 Accord Human Resources, Inc. Regional PEO Imaging Technologies Strategic

Dec-02 National Employment Alternatives Regional PEO Trident Systems Strategic

Dec-02 Undisclosed PEO Regional PEO Pacel Corporation Strategic

Nov-02 StaffAmerica National PEO The Cura Group Strategic

Oct-02 BeneCorp Business Services Regional PEO Pacel Corporation Strategic

Oct-02 Aampro Group, Inc. Regional PEO Trident Systems Strategic

Sep-02 Advantage Payroll Services Payroll Services Paychex Strategic

Sep-02 Undisclosed PEO Regional PEO Pacel Corporation Strategic

Sep-02 Undisclosed PEO Regional PEO Pacel Corporation Strategic

Aug-02 PEO-USA Regional PEO The Nelco Companies Strategic

Jul-02 Meridian Regional PEO StaffAmerica Strategic

Mar-02 The Frick Company Regional Outsourced HR TALX Corporation Strategic

Mar-02 Enstructure, Inc. Regional PEO Imaging Technologies Strategic

Mar-02 Group 4 Regional PEO TEAM Mucho Strategic

Feb-02 Inovis Regional PEO TEAM Mucho Strategic

Feb-02 Strategic Staff Management Regional PEO TEAM Mucho Strategic

Jan-02 Corporate Staffing Concepts Regional PEO Team Staff Strategic

Jan-02 Amfinity Business Solutions Regional PEO Presidion Solutions Strategic

M&A Drivers


PEO History From a Dealmaker's Perspective

Start-up & rapid expansion phase:Low-cost of entryPowerful business modelUnpenetrated marketsInsurance arbitrage promised profitsEasy insurance market


PEO History from a Dealmaker's Perspective

Health-insurance wave:Tempting self-insurance margins lead to exposure

that kills many PEOsOr drives them to merge with others



Workers' Comp Wave ITempting self-insurance margins lead to exposure

that kills many PEOsOr drives them to merge with others



Workers' Comp Wave II:Major comp insurers pull out of PEO

underwritingKills more PEOs Or drives them to merge with othersOr drives them to seek stronger financial partners



Scale and Specialty-Driven PhaseEconomies of scale favor larger PEOsWorkforce specialization drives higher margin

• Medical – technical – professional specialists• Traditional labor specialists with industry

concentration

Winners will be big regional, national, and specialist firms

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 / earningsEV/WSE = price or value per Worksite Employee


EV/EBITDA Trends

Company Value Trends

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Administaff Presidion Gevity HR

Val

ue

to E

arn

ings

(E

BIT

DA

)

2003

2004


EV/WSE Trends

Enterprise Value per Worksite Employee

-500

1,0001,5002,0002,5003,0003,5004,000

Val

ue 2003

2004


Valuation Trends

Enterprise Value per Worksite Employee

-500

1,0001,5002,0002,5003,0003,5004,000

Val

ue

2003

2004

Team Staff Deal

EPIX DealDeal Range


Valuation Trends

Gevity Deal Price per Worksite Employee

$0

$250

$500

$750

$1,000

$1,250

TeamAmerica TeamStaff EPIX


Today – 3 Markets

Strategic – high valuePublics valuation range ~ $3,000 / WSEBuying strong PEOs at ~ $1,000 / WSEat or below 4 to 6 times EBITDA

Strategic – bottom feederLarge, medium, & small buying weak PEOs cheaply

Private Equity Firms (financial buyers)Buying at 4 to 6+ times EBITDA

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


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


Value from Fund's Perspective

Value = expected total cash returnOver an expected holding period of 3 to 7 years


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 buyOr an IPO


Private Equity Deal Structure

Objective: match price and payments to minimize riskPortion in cashPortion in subordinated notes

• (seller or institution)

Portion in share of future earnings (earn-out)Re-invested equity from sellers (10% to 40%)


Private Equity Triage

To private equity firms, you are either:1. A platform

2. A tuck-in

3. Or an Exit

Key Take-Aways


Key Take-Aways

1. PEO is an active M&A marketplace Deals are fewer, but quality is better

2. Macro trends are continuing to drive consolidation 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

3. Owners need to be either a buyer or a seller in the next 3 years

4. Strategics will buy at the bottom – or in the middle of the range

5. Certain Financial buyers will buy profitable PEOs if they believe in management, growth, and an exit

Today's Merger & Acquisition Environment for PEOs John R. Hammett Managing Director, Head of M&A...

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