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VALUE FOCUS Professional Services Industry VALUE FOCUS Professional Services Industry Year-End 2014 Executive Summary Inside • Macroeconomic factors have been favorable although the sector was up 35.8% in 2013. Cur- Macroeconomic Trends 1 for the professional services industry since the rent and forward EV/EBITDA multiples for the Market Performance 3 recession, and the second half of 2014 has seen consulting sector are 10.9x and 9.2x, respec- Professional Services a continuation of these trends. Unemployment tively, which implies weaker EBITDA growth M&A Activity dropped to 5.6% while corporate profits and relative to the staffing companies. Overall, private investment continue to grow in the U.S. firms in the professional services industry saw Staffing Sector 4 These indicators suggest a favorable, though exceptional growth in 2013, but lagged the S&P Consulting Sector 6 conservative, outlook for the professional ser- 500 significantly in 2014 as growth prospects Guideline Company Pricing vices industry. have become more tempered going forward. Staffing Sector 8 • Despite a stronger economy, both the staffing • M&A deal volume is on the rise for the consulting Consulting Sector 9 and consulting sectors lagged the S&P 500 over and staffing sectors. Annual volume for 2014 About Mercer Capital 10 the past twelve months. The staffing sector has reached five-year high levels for each sector. seen median stock price decline of 6.2% during Strategic buyers continue to be the driving force 2014, compared to an increase of 58.5% during behind increased volume. Both sectors have SPECIAL SUPPLEMENT 2013. Current and forward EV/EBITDA multi- experienced growth in the post-recession era, Fairness Opinions: Evaluating a ples for the staffing sector are 10.7x and 7.7x, have high cash reserves, and continue to look Buyer’s Shares from the Seller’s respectively. The consulting sector has seen for expansion opportunities. Perspective a median stock price decline of 2.7% in 2014, What are Professional Services Firms? The professional services industry includes consultancies, research firms, staffing and employment businesses, engi- neering, architecture, accounting, legal, and specialty professional practices. Many professional services firms are privately held, though two sectors include multiple public companies: consulting and staffing. This publication empha- sizes market and transaction activity for these two sectors, but the economic trends and valuation drivers discussed could apply to any professional services firm. www.mercercapital.com Mercer Capital’s Value Focus: Professional Services Industry Year-End 2014 Macroeconomic Trends The professional services industry is closely tied to macroeconomic expected to grow between 3.6% and 4.0% annually through 2019, trends. Three key economic indicators include the unemployment according to IBISWorld. rate, corporate profit levels, and non-residential private investment expenditures. In sum, these indicators shed light on the general The consulting sector experienced a negative shock at the outset of health of business in the U.S. As these indicators become increas- the economic downturn. However, once corporate profits returned ingly optimistic, the outlook for companies in this sector generally to prerecession levels, the industry recovered and expanded with improves. From mid-2008 to mid-2011, the professional services average annual growth of around 4.5% from 2010 through 2014. The industry experienced challenging circumstances. Currently, positive massive reduction in corporate profits in 2008 caused companies to economic news and outlook have created opportunities for growth. cut costs, including those deemed unnecessary to the core business. Upon recovery, companies resumed spending on consulting and research services. According to IBISWorld, the sector is expected to Unemployment and Corporate Profits grow over 3.6% annually over the next five years. The staffing sector saw severe decline in 2008 as companies had to The second half of 2014 showed continued signs of improvement in cut staff and reduce costs. Corporate profits rebounded in 2009, but the macroeconomic landscape, albeit at a more conservative pace. a lack of economic optimism caused companies to remain conser- Unemployment fell from 6.1% in June 2014 to 5.6% in December vative with staffing expenditures. Furthermore, private investment, 2014. In comparison, the unemployment rate dropped by 0.8 per- a proxy for confidence, did not improve until late-2011. In 2011, as centage points over the same period in 2013. Corporate profits have unemployment began its steady descent from recession highs, com- continued their expansion as well with a 4.7% increase in profits from panies began to increase staffing levels. Initial growth occurred in second quarter to third quarter, while the same period in 2013 expe- the firms that specialized in temporary staffing solutions. As unem- rienced 1.7% growth. Despite a decrease in the growth rate in the ployment continued to fall, long term hires and HR expenditures second half of 2014, corporate profits continue to increase. grew. Since 2011, the industry has continued to strengthen and is Historical Trends in Unemployment & Corporate Profits 12.0% 60.0% 10.0% 50.0% 8.0% 40.0% 6.0% 30.0% 4.0% 20.0% 2.0% 10.0% 0.0% 0.0% -2.0% -10.0% Unemployment Rate (%) -4.0% -20.0% -6.0% -30.0% Quarterly Change in Corporate Profits (%) -8.0% -40.0% -10.0% -50.0% -12.0% -60.0% Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Unemployment Rate (%) Quarterly Change in Corporate Profits (%) Source: Capital IQ © 2015 Mercer Capital 1 www.mercercapital.com Mercer Capital’s Value Focus: Professional Services Industry Year-End 2014 Macroeconomic Trends Non-Residential Private Investment Quarterly Change in Private Non-Residential Fixed Investment Non-residential private investment has 8.0% continued to climb, experiencing positive 6.0% growth since 2010. Between second quarter and third quarter, private invest- 4.0% ment increased 0.5% compared to 2.8% 2.0% in the same period in 2013. As profits continue to rise and private investment 0.0% increases, revenues and profits are -2.0% expected to increase for the professional -4.0% services industry. Growing employment optimism can push growth for staffing -6.0% firms that will be utilized for recruiting in -8.0% an increasingly competitive marketplace. Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Future growth for professional services is Source: Federal Reserve Economic Data expected to proceed at more moderate levels and roughly mirror GDP, com- pared to recent quarters that exceeded expectations. Growth Outlook Industry Revenue Growth by Subsector The growth outlook for the professional 8% services industry is varied when broken 7% into subsectors. The largest three 6% subsectors by revenue (Law Firms, Man- agement Consulting, and Office Staffing 5% & Temp Agencies) expect growth in the 4% next five years to be below 4.0%. For 3% areas such as Management Consulting 2% and Office Staffing & Temp Agencies, these forward growth rates represent a 1% decrease from the growth observed in 0% Office Staffing Scientific & Environmental Management Employment & Architects Accounting HR Consulting Law Firms the previous five year period. The chart & Temp Economic Consulting Consulting Recruiting Services Agencies Consulting Agencies represents average annual growth rates Last 5 Years Next 5 Years for nine subsectors over the last five Source: IBIS World years and for the next five years. © 2015 Mercer Capital 2 www.mercercapital.com Mercer Capital’s Value Focus: Professional Services Industry Year-End 2014 Market Performance The staffing sector lagged the S&P 500 during 2014 with a slight decline of 0.83%, relative to growth of 11.39% for the index. After strong growth in 2013, staffing expectations have fallen more in line with market performance. Furthermore, uncertainties exist as to what role staffing companies will play as the economy strengthens. Industry observers suggest that, moving forward, individual company gains greater than GDP growth will be mostly the result of market share gains as opposed to overall industry growth. Therefore, the last six months have seen tempered expectations in the staffing sector. The consulting sector also lagged the S&P 500 during 2014 and experienced a decline of 3.07%. Stock price performance saw a significant decline from mid-August to mid-September as economists revised full-year estimates on national GDP. The industry faces multiple headwinds such as continued uncertainty in government spending and the growth of more technology-focused consulting solutions. The information below presents median valuation multiples and stock price changes for the two groups. In general, the professional services industry outperformed the broader market in 2013, but slower growth translated into tempered performance in 2014. Although economic outlook for the professional services industry remains positive, future growth is likely to be more in line with the general economy. Index Performance 20.00% 15.00% 13.40% 11.39% 10.00% 5.00% 0.00% -0.83% -3.07% -5.00% -10.00% -15.00% -20.00% S&P 500 Index NASDAQ Composite Index Consulting Staffing Source: Capital IQ. Sector Indices are weighted by market capitalization Summary Performance and Valuation Median % Change EV / EBITDA Number Segment of Companies YTD LTM EV / Rev. LTM LTM 2015E Staffing 19 -6.20% 58.45% 0.59x 10.7x 7.7x Consulting 18 -2.70% 35.81% 1.21x 10.9x 9.2x Source: Capital IQ © 2015 Mercer Capital 3 www.mercercapital.com Mercer Capital’s Value Focus: Professional Services Industry Year-End 2014 Professional Services M&A Activity // Staffing Sector The final six months of 2014 saw 66 Annual Transaction Volume staffing transaction announcements by 61 different buyers. This volume is flat 140 132 when compared to the first six months 128 126 of 2014. 120 The sector has seen a general trend 100 86 upward in the number of transactions 84 80 being completed since 2010.
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