Recruitment Down Under: The APSCo Australia Podcast
Welcome to Recruitment Down Under: The APSCo Australia Podcast. We’re the podcast for the Australian recruitment market, sharing anecdotes, interviews and ideas from the recruitment industry's best and brightest. Join us for regular episodes where our guests discuss the topics that affect you and your recruitment business.
Recruitment Down Under: The APSCo Australia Podcast
Deal Makers - Episode 2
Welcome to Deal Makers – the podcast where recruitment meets real-world M&A.
In this episode, we unpack the strategy behind some of the industry’s most talked-about deals – from billion-dollar healthcare mergers to niche perm businesses commanding sky-high multiples.
Featuring Lesley Horsburgh from APSCo Australia and M&A expert Paul Masters, this is Episode 2 of Deal Makers.
Is it true that a 70% perm business sold for seven times last year with a market valuation of $52 million? You heard it right Niche, market quality management team and a strategic buyer. It's a magic formula and, yes, it actually does happen.
Speaker 2:Welcome to Dealmakers, the podcast where recruitment meets real-world M&A. In this episode, we unpack the strategy behind some of the industry's most talked-about deals from billion-dollar healthcare mergers to niche perm businesses commanding sky-high multiples. Featuring Lesley Horsburgh from Appsco Australia and M&A expert Paul Masters, this is Episode 2 of Dealmakers.
Speaker 3:Welcome back everyone to Dealmakers. This is Episode 2. I am Lesley Horsburgh from Apsco, australia, and I'm joined once again by Paul Masters, our M&A guru, the man of the moment in the M&A market for recruitment and staffing. Welcome back, paul.
Speaker 1:Great to be back, lesley. Thank you, yeah, and I wasn't joking there, that is true. So seven times for a 70% perm business. That is phenomenal. Yeah, it just shows you that if you find the right buyer out there, you can still get those high multiples, and we'll talk a little bit more about that as we go through today. Fantastic.
Speaker 3:Okay, paul, I thought what we might do to start up this episode is have a little review of the recent activity in the M&A market. The first deal that I wanted you to maybe unpack for us is Kelly Services in the US acquiring Motion Recruitment Partners, also in the US, which happened last year. The valuation was $425 million upfront with a $60 million earn out. It was Kelly's biggest deal to date, expanding their tech stuffing, rpo and government services via Motion's brands like 7step and TG Federal. Do you want to maybe unpack that a little bit and talk to it, paul?
Speaker 1:Yeah, it's an interesting deal.
Speaker 1:The reason that we've chosen that here today is don't get caught up too much in the fact that it's in the US and it focuses on Northern America.
Speaker 1:Don't get caught up too much in the fact that it's in the US and it focuses on Northern America. It's more the trend of the larger agencies and their acquisition strategies, and this is a textbook case of where the larger agencies are focusing on higher margin work and we're seeing this right across the board. If you go and have a look at the acquisition strategies of ADECO, manpower Recruit, randstad, you'll see exactly the same thing. You'll see that the focus, their acquisition strategy going forward over the next, the short term, the next three years to five years, is for that higher margin work and that's exactly what Kelly's done here. Motion recruitment we wouldn't know them here, they don't operate here, but it's, you know, predominantly RPO. A lot of professional services work, that higher margin work that pushes up the margins on their average margin across the group. And, as I say, I constantly see this when I look at the acquisition strategies of the larger agencies.
Speaker 3:Higher margin work. That's the dream in Australia, I think at the moment, particularly in my Absolutely, and you know what they view as high.
Speaker 1:Margin is almost unachievable here, and it's something that does frustrate US buyers when they look at the Australian market.
Speaker 3:Do you think it puts them off?
Speaker 1:Yeah, absolutely, and I think that's why we haven't seen any deals, any large US deals, done in Australia, probably since Allegiant bought Talent 2, you know, going back over 10 years ago. So it is a problem for the industry and they just view the margins that we get here as destructive to their average margin globally.
Speaker 3:Yeah, that's totally understandable, I would imagine. Second deal that I wouldn't mind a little bit more insight in is AIA.
Speaker 1:Healthcare, yeah, aia.
Speaker 3:Also US, which merged with cross-country healthcare. This was also last year. The valuation was, I believe, undisclosed, but estimated to be between two and three billion. And this is two US healthcare giants joining forces to boost their reach and continuing to address the shortage of medical professionals. I'm guessing.
Speaker 1:Yeah, yeah, this is a mega deal. You know I'm surprised that this deal was allowed to happen. I think after the merge or the, the, the, the, the transaction, they'll have 30 percent of the uh, of the the local market there in the sectors that they operate in. It's, it's, it's big uh, but I think, from a, from a again, from a, a strategic point of view, it's, it's, it's important to just leave the size aside for the moment and the fact that it's in Northern America and it's very, very much focused on Northern America.
Speaker 1:Again, it shows a trend of businesses in the cyclically resilient sectors like healthcare. There's a lot of money being pumped into these sectors and Aero was funded by private equity some of the larger private equity houses in the US and we're seeing this trend globally to these cyclically resilient industries like healthcare, education, life sciences, anything that's perceived to be quite resilient to economic conditions.
Speaker 3:And this is a great example of that. Phenomenal. 30% is huge, isn't it? It is the third one, and the last one that we want to touch on is AirSwift in the UK that's acquired energy resourcing from Worley, which is actually Australian. The deal also took place in 2024 and was valued at an estimated $60 million to $80 million. This is a cross-border acquisition that deepens Airswift's presence in Asia-Pac and strengthens its energy infrastructure and capabilities.
Speaker 1:Yeah, it's a deal. It's a deal that probably, you know, went below the radar for a lot of you know, a lot of the agency owners in Australia. But again, you know, the point we want to raise here is that we're probably likely to see a few more of these deals where businesses it could be in Australia, it could be globally have these non-core assets being a recruitment and staffing business as part of their business, because Woolly Parsons is not considered to be a staffing and recruitment business.
Speaker 1:They're considered to be an engineering business and the staffing and recruitment that part of their business was considered to be non-core. So it was an easy way to offload part of the business that the market really didn't perceive was valuable in the Worley story. So we'll probably see a few more of these over the next couple of years. I would expect to see some of the larger Australian businesses that have a recruitment and staffing arm to their business and some of you know you may not even know it exists within those businesses, but if it does, there is a chance that they may offload those just to free up some working capital within the business. So yeah, just keep an eye on that aspect.
Speaker 3:And when you look at those three examples that you've just talked to, I mean, what does that mean more broadly in terms of you know what the future might look like? Do you think they're an indication, they're a barometer of what else is to come?
Speaker 1:Yeah, I think they are. I think if you look at each of those acquisitions, it fits a strategic play for each of those businesses, whether it's on the buy side or the sell side, and what we'll see going forward over the next 24 months is very strategic acquisitions going forward over the next 24 months is strategic, very strategic acquisitions. We're not going to see a lot of bolt-ons or, you know, mass consolidation of agencies to just get that volume there. We've certainly moved away from that era and we all those who have been around the traps for a long time, all remember the Rubicles of the world that tried to, you know, to achieve that bulk play. We won't see those type of consolidations. They're very, very the transactions that we see will be very strategic and those three are all textbook examples of strategic plays.
Speaker 1:Yeah, and I guess, given how the market's unfolded for the last probably what 12, 18 months now and continues, and some of the pressures that we're seeing on margins and you know, shifts from government uptake of contingent workforce, things like that, yeah, strategic acquisition it can't just be about volume or market share kind of correct pretty, yeah, future correct, correct and and exactly and, and you know what you've highlighted there margin uh is is going to be critical uh, particularly when you're looking at growth, looking at forecasting, because what may have been achieved in the last two years or three years or five years, may not be achieved in terms of margin, may not be achieved in future years, and that you know the acquirers, that will come out in due diligence. And you know, if you've got wild forecasts that don't show an accurate depiction of what the margins will be in future years and you can't prove that those margins will be achievable in future years, you will be found out in due diligence if you sell your business.
Speaker 3:Interesting point. Okay, paul, I think it's appropriate now to look at the numbers, and obviously we always hear all sorts of rumours about valuations. You know what's been achieved on transactions, but what is really happening with multiples at the moment?
Speaker 1:Yeah, look, and I think the best place to start with here is look, there are multiple factors at play. I mean, yeah, excuse the pun. Firstly, I think the most important consideration here is what are we talking about when we talk valuation? Are we talking about fair market valuation or are we talking about transactions in the market? Now, there is a big difference. So if you go and get your company valued and you get a valuer in to value the shares and that you could get that done from, you might have an employee share plan being put in place, or you might be involved in a restructure and you're valuing the business, Now the valuer that you engage will value the business based on what's called fair market value, and fair market value is a little different than the valuations. What is the price that will be paid? And that's actually an accounting standard. So that's what the value is basing that valuation on. So it's not unusual for let's use that four quarters business as an example Four quarters sold for seven times and if we were to go and get a fair market valuation on that business, that fair market valuation may only come out at five times or it could even be less. So it's important to understand there are two different types of valuations here.
Speaker 1:If we're just talking about transactions in the market and that's where the rumors really circulate is what was achieved. Now some of these deals are private deals. Now the four quarters deal, we can talk about that because that was bought by a public company in Japan. But a lot of the deals out there are private deals. So we don't have the details of the multiples. But what I can safely say from the deals that I've been involved in, that generally if you find a strategic buyer you should achieve anywhere from six times up.
Speaker 1:But you've got to find that strategic buyer. That's the key. If you're some sort of bolt-on or you're a distressed seller, you're never going to achieve those multiples. It has to be a quality business that's selling and in Four Quarters' case it was. It's got a great management team, no client concentration issues, you know great legal, financial and tax governance within the business. If you've got those things in play then you can get those higher multiples. So so the, the, the multiples in the market, the that are being achieved on transaction, should be six times up. And that's if you find the right strategic buyer. If you just sell to the first person that knocks on the door, then you probably won't achieve those numbers. If you run a proper process, you should find the right strategic buyer globally. Right, okay, proper process, you should find the right strategic buyer globally.
Speaker 3:Right, okay, and what about contract temp versus perm? What's the difference there?
Speaker 1:Yeah, good question. Traditionally there has been a difference between the multiples paid for contracting and perm. For obvious reasons, contracting is considered to be reoccurring and a safer bet. If a consultant leaves, it's more likely that the revenue will remain within the business. So traditionally that has been the case. But in saying that, you know, going back to the four quarters deal, you know that's a 70% per business and we're still achieving a high multiple and it's about finding the strategic buyer. And you know we may see a trend towards a perm as much as there has been a trend towards contracting in the past, contracting in the past. And the main reason for that is that if it's a great perm business, has a lot of consultants, good teams, diverse clients and the governance within that business is great, then you can achieve those high multiples.
Speaker 1:I'm often asked that you know we've got a prominently perm business. Should we go to contracting? If you asked me five or ten years ago I would have said absolutely, 100% move. You know, make sure that you get that 50-50 of gross profit in. You know 50% perm, 50% contracting. But my view over the last 24 months, probably post-COVID, is that it's not as important as it previously was. What's important is finding the right buyer for the business. So if you're predominantly a perm business, you want to find a predominantly perm buyer, and that's where you'll get the best valuation.
Speaker 3:Yeah, yeah. And I guess, if you think about you know the compliance with contract.
Speaker 1:Yeah, and the risk that goes with it, yeah.
Speaker 3:Yeah, it is a lot more complicated, so perm does seem a bit more a safer option, maybe.
Speaker 1:Yeah, yeah, no, no, no, Absolutely absolutely.
Speaker 3:Okay, fantastic. I thought it might be interesting to talk. I know we mentioned a cross-border um deal in in the three that we um we summarized earlier um and I know you know in previous conversations you and I have spoken about the high interest from from countries like japan, um into australia and um uk firms as well. So it'd be great for you to unpack what's driving that and maybe you know how you see that evolving in the coming years.
Speaker 1:Yeah, yeah, look, I mean, that has been the. When you look at the deals, they are definitely the two standouts within the Australian. When we look at acquisitions leaving aside the acquisitions that have been local a local buyer but Japan and the UK is, you know, they like Australia for different reasons, you know. I think that the attraction for the Japanese is more along the lines of okay, we've nailed the Japanese market, we need to expand. We need to do it through acquisition, where is a great geography to consider expanding into? And, as we mentioned in our last podcast, and as we mentioned in our last podcast, the Australian region is the second largest recruitment region in APAC, you know, japan being the largest. So it is a good springboard. Singapore's the other obvious place, but Singapore market is very small compared with the australian market. So so they like australia because it, you know, because strong, strong governance from a, from a, um, from a legal perspective, they feel their money is safe, their, their investment is safe here and it's it's it's a good time zone. It's it's it's it's close to uh, to japan and um, and they feel that there's opportunities for growth within the Australian economy. So, look, I think also it's just due to the, they can make an acquisition here and have a meaningful penetration into the market, whereas if they go to the US they've got to acquire something extremely large to have any type of penetration into that market. So they do like Australia.
Speaker 1:The UK is probably a bit for different reasons. Australia the UK is probably a bit for different reasons. The UK business is like Australia because it's very similar in terms of the. Again, in legal governance, you know we're obviously based off Westminster system. It's all the legal, the way things work legally is very similar and it's considered to be a market, again, that's meaningful in terms of size but not too big that it will break the bank. So I think you know they're probably the two main reasons and I can see those two businesses from those two countries as being the central acquirers over the next 24 months.
Speaker 3:Right, okay. And then, when we look at post-deal integration, what are? You seeing now what's happening.
Speaker 1:Yeah, it's, look it's. You know it's probably one of the, you know, the biggest issue that scares businesses or acquirers from making acquisitions, acquisitions. And you know, we've, we've seen great stories, we've seen disasters. I mean, we all, we all know about the disasters and we won't won't really delve into those today. But when I look at the, when I look at the, the, the great um, uh stories, yeah, the, the, the, the pin-up company, the pin pin up country has to be Japan. It's just they've had very little.
Speaker 1:If I go back and have a think about all the acquisitions that have been made here, whether it's recruit with People Bank, chandler McLeod, or outsourcing, with the numerous acquisitions, and Will Group with the numerous acquisitions they've made, they've all managed to hold the businesses together. And you know, each of those businesses is still as strong, as far as I'm aware, as strong as the day that or stronger than the day they acquired it. So their formula is a bit different. They don't touch the companies after acquisition, apart from reporting back to Tokyo. There isn't a lot of meddling with the business. You don't see them going in there and say, okay, you're moving to our CRM, or you're moving to our payroll system, or you're moving. You know there isn't that level of. In fact there's very little meddling in the business. They like to have the same management teams in there, I guess, then isn't it really?
Speaker 1:Yeah, it's business as usual. And even post the earnouts, you know, we see we quite often see the owners hang around for the simple reason that the Japanese make it. Yeah, they make it financially attractive for those owners to remain around. I mean, you know, like you look at, say, james Hone of Bluefin, he was there for, you know, nearly five years after the earn-out finished and I think you know they like to see that founder remain in the business and keep an eye on that business, almost take a chair role in running the business. So we do see that a lot and I like the Japanese from the perspective, the way that they handle acquisitions. Here you can see why they're successful.
Speaker 3:I would imagine it brings a consistency as well, particularly when you look at the people that you know are in the business. If that founder is staying there and you know they're still around, that's the level of safety consistency for the people.
Speaker 1:Correct correct. Nothing's really changed.
Speaker 3:Yeah.
Speaker 1:Yeah, that's right, nothing's really changed and they don't change, they rarely change the names of the business. They, you know, they like the local brand names. They, you know, they tend to run with them. Even, you know, even recruits. Acquisition of PeopleBank you know, channel McLeod's obviously has been merged into. Oh no, it's the other way around. Peoplebank's been merged into Channel McLeod. Yeah, yeah, sorry, peoplebank's been merged into. Oh no, it's the other way around. It's a PeopleBank. It's been merged into Channel McLeod. Yeah, sorry, peoplebank's been merged into Channel McLeod. So you know, they've still retained that local name here and you know they haven't rebranded it, whereas we see, you know examples out of Europe, particularly with some of the businesses based in the Netherlands, where they just go in and just go no, we're changing everything.
Speaker 1:Well, we're changing it, you know, over a period of two years.
Speaker 3:And it changes Interesting. Well, that brings us to, I guess, the final section for today's episode, which is where I ask you to have a look at the next three months and give us a bit of a glimmer into what lies ahead.
Speaker 1:Yeah, it's still pretty choppy out there. I mean, we're hearing stories that things are picking up and confidence levels are starting to return to the market, but I wouldn't say it's flowing through to consults consistently. We might see periods where results are up, but then, in the same vein, we'll see periods where they fall back again. So we haven't seen that consistent growth. Obviously, we've seen two interest rate cuts. There's a prediction for more this year. Hopefully that does breed some more confidence into the market because it really is impacting most sectors and and uh and you know you, you know you, you you mentioned leslie. You know we're, we're, there are other, you know there are other. You know um, uh concerns within the industry as well in terms of margin, uh in in, in particular, um in industry sectors. So you know that that that is. You know that that is obviously impacting sectors that were, you know that are considered to be traditionally quite resilient, like technology and healthcare, and particularly from a government perspective.
Speaker 3:Interesting. Well, let's hope things are looking a lot brighter next time we meet. That's it for this month. I just want to thank Paul, of course, for your time and all your insight.
Speaker 1:Thank you, Leslie.
Speaker 3:Really fascinating. I'm loving this podcast. It's so interesting and I know from the response that we had from Episode 1, I think the listeners are echoing that sentiment. So, yes, we're very pleased to bring you Episode 2 and we will be back again in a month. So that's it for now. We're signing off, Paul. Thanks very much and have a fantastic day.
Speaker 1:Thanks, thanks, leslie.