Valuation Update for the HR Outsourcing Industry

July 31, 2010
According to Accenture’s recent report, The High-Performance Workforce Study 2010, the hiring sentiment among senior executives continues to improve, indicating that companies are beginning to shift from cost control to investing in future growth. Based on the survey results, compared with 12 months ago, executives focused primarily on cost control declined from 41 percent to 15 percent, while 40 percent of executives are investing in growth-oriented activities. New employees are primarily being added to meet specific needs for launching new products or entering new markets, and to add employee skills required for the future. While the sentiment continues to improve, this has yet to translate into a significant improvement in the job market. Although the unemployment rate declined slightly to 9.5 percent in June, the U.S. economy shed jobs for the first time in 2010, adding to concerns that the pace of the economic recovery could slow in the second half. It appears the difficult environment HRO service providers have been facing since the recession began will last at least through the end of 2010.

Merger and acquisition activity in the HRO industry remained active in July. The following are among the notable transactions announced in July:

• Professional staffing services provider Peoplebank Holdings Pty. Limited announced it has signed an agreement to acquire Ross Human Directions Ltd. (ASX: RHD) for approximately US$43 million in cash. The deal implies a valuation of 0.1x revenue and 4.7x EBITDA based on Ross’s 2009 results. Ross provides HR services throughout Australia, Asia, and the United Kingdom including staffing services, HR consulting, career management, and training services. The acquisition strengthens Peoplebank’s HR service offerings and expands its geographic footprint beyond its core Australian market. (Source: Peoplebank Holdings Pty. Limited press release, July 19, 2010)
  
  
• HRO and business process outsourcing solutions provider Dalrada Financial Corporation announced its acquisition of HR Connect Payroll LLC for an undisclosed amount. New Jersey-based HR Connect provides a variety of HRO services including payroll, benefits and pension administration, compliance, and workers' compensation solutions. The transaction expands Dalrada’s service offerings and strengthens its ability to service small businesses, which HR Connect has historically focused on. (Source: Dalrada Financial Corporation press release, July 15, 2010)
  
  
• Insurance brokerage and consulting services provider Aon Corporation (NYSE: AON) announced it has acquired Hewitt Associates, Inc. (NYSE: HEW) for approximately US$4.9 billion in cash and stock. The deal implies a valuation of 1.6x revenue and 7.6x EBITDA based on Hewitt’s March 2010 LTM results. Illinois-based Hewitt provides human resources benefits, outsourcing, and consulting services. This transaction will nearly triple the size of Aon’s consulting business and will create the world’s largest human resources service provider. The deal will allow Aon to provide a broader portfolio of solutions and reflects the favorable economics of combining commercial insurance brokerage and human resources consulting businesses. (Source: Aon Corporation press release, July 12, 2010)
  
  
• Outsourcing solutions provider Automatic Data Processing, Inc. (NASDAQ: ADP) announced it has entered into an agreement to acquire Workscape, Inc. for an undisclosed amount. Massachusetts-based Workscape offers Web-enabled human resources self-service solutions to enterprise clients. The company’s applications provide talent management, online benefits administration, and employee communication solutions. The acquisition will expand ADP’s existing technology-based benefits marketplace platform. (Source: Automatic Data Processing, Inc. press release, July 1, 2010)