PEO Industry Gears Up for Consolidation
By Firas Al-Atraqchi
Monday, June 25
It's been more than six months since the Nasdaq's dramatic downturn and more than a year since the dot-com dream became little more than a haze. Former tech wonders such as Nortel [NT], Cisco [CSCO] and JDS Uniphase Corp. [JDSU] saw their zeitgeist fade as investor confidence slowly eroded. While Alan Greenspan continued his efforts to buoy the U.S. economy with interest rate cuts, markets looked about frantically for new heroes.
The Professional Employment Organizations (PEO) industry may provide a dash of the spirit needed to revive investor confidence. Slowly developing in the domestic services sector since the 1980s, it is today one of the fastest growing industries, rivaling the growth of the Internet and telecoms but without the fanfare. The PEO industry saw gross revenue increase from $5 billion in 1991 to $26 billion in 1998 with a projected increase of 35% in 2001.
An Outsourcing Boom
A PEO provides integrated, efficient and cost-effective management and administration solutions to human resources-related issues. By entering into a contractual relationship with its clients, a PEO oversees the payment of wages, tax issues, reports, debt collection, and has the right to hire, fire, and reshuffle employees. In effect, a PEO sets the foundation for employer relationships with its clients' workers and contractually "adopts" the responsibility of handling employer rights, responsibilities, and risk. The PEO thereby frees the client to focus on increasing revenue and production.
With the tech-heavy Nasdaq in a comparative slump, PEOs are emerging as one of the most promising recession-busting commodities for investors. In contrast to volatile technology and energy sectors, PEO stocks have maintained slow, but steady growth. According to industry analysis, the PEO industry witnessed gross revenue increase from $5 billion in 1991 to $26 billion in 1998 with a projected increase of 35% in 2001. With 2,500 PEO companies penetrating only 3% of the U.S. employment market, industry reports from the National Association of Professional Employment Organization (NAPEO) indicate there is ample room for growth.
The growing popularity of PEOs may have something to do with the changing scope and setting of business. In North America today, there is an increasing capacity for businesses to turn to outsourcing for operational and administrative tasks. With increasingly complex laws, regulations, business principles and tax legislation introduced over the past few years, businesses are finding it human resource operations all too time-consuming and exhaustive. With small businesses increasing geometrically and vying to provide competitive health care and related benefits to employees, there is a greater market demand for human resource outsourcing. Contributing to PEO popularity is the change in government attitude toward human resource outsourcing. Regulatory authorities are now embracing PEO services as more companies receive state and federal regulatory approval.
PEOs See Bolstered Revenue
Some of the prominent players in the PEO industry include Manpower Inc. [MAN], Administaff Inc. [ASF], Staff Leasing Inc. [STFF] and Spherion Inc. [SFN]. For the fourth quarter ending December 31, 2000, most PEOs registered remarkable revenue growth: Administaff saw its revenues jump 54 percent to $3.7 million while international powerhouse Manpower saw a three percent growth to $12.44 billion.
Although these figures are impressive, most of the industry remains fragmented and in need of amalgamation. Enter the age of mergers, consolidation, and strategic alliances that attract high-tech companies to venture into the outsourcing market. The introduction of Internet technologies into the industry is expected to create significant value for PEOs and their clients. Although most PEOs are just waking up to the advantages of consolidation and Internet integration, some companies are already pioneering ambitious market strategies geared to solidify the industry and increase market penetration.
Consolidation is the Key
In 1997, TEAM America Corporation began the consolidation trend by focusing on acquiring smaller PEOs. Currently the outsourcing division of TEAM Mucho [TMOS], Team America saw its annual sales jump from (U.S.) $95.47 million in 1996 to $340 million in 1998.
Detroit-based SES, the largest privately held PEO in the U.S last year, has recently continued this trend with letters of intent to acquire both United Staffing of America Ltd. and Staff Leasing Corporation. With offices in 42 states, servicing over 2,700 clients and more than 39,000 worksite employees, SES recorded revenues of approximately $979 million in fiscal year 2000, and $210 million in the first quarter of 2001. With consolidation being the key to profitability in the highly fragmented PEO market, SES is currently pursuing further acquisitions that are projected to result in consolidated revenues approaching $2 billion.
The PEO Powerhouses
Company Ticker Symbol Share Price (6/25/01) 2000 Revenue (millions) Market Cap (millions) Projected EPS (2001)
Administaff ASF $21.75 $3,708 $594.8 $0.73
Kelly Services KELYA $23.95 $4,487 $858.1 $1.13
Manpower MAN $30.83 $10,842 $2,337.0 $2.50
ProBusiness Services PRBZ $23.25 $104 $560.7 -$1.53
SES-Corp.* IVGG $1.08 $979 $51.4 $0.06
Spherion SFN $8.02 $3,740 $468.3 $0.50
Staff Leasing STFF $3.81 $3,104 $78.5 $0.03
Team Mucho TMOS $2.90 $51 $28.1 N/A
* SES-Corp. acquired by IVG Corp. March 30, 2001
Late last year, SES was itself acquired by Houston-based publicly traded business development company IVG Corp. [IVGG]. Relative to other major PEOs such as Manpower and Administaff, SES shares appear to be significantly undervalued ($1.09 as of 06/18/01), at only 18 times projected 2001 earnings as compared to an average industry P/E ratio of 44.
"The merger with IVG marks an important first step in our plans to consolidate the PEO industry," commented SES CEO Dennis Lambka. "The collaborative nature of the deal and the clear strategy established for the future sets the stage for our success. We have already identified several prospective acquisition targets, and anticipate a series of significant announcements over the coming months."
The race for industry consolidation is quickly becoming the focal drive of many PEOs. According to De Bellas and Co., the U.S. leader in providing specialty investment banking services to staffing companies, 254 staffing PEOs were sold or merged last year while 453 other PEO companies entered some form of business alliance by the end of 1998.
Last October, Spherion Corporation [SFN], a $3.8 billion PEO, acquired JobOptions.com, an online recruitment solutions provider. The acquisition gave Spherion access to JobOptions' network of 55 customized member career centers. With human resource management continuing to evolve into the mainstream of American business today, the PEO industry is an increasingly lucrative response to the challenges facing small to medium businesses. Consolidation of the industry has emerged as a necessity in light of a significant increase in employment-related federal, state, and local laws and regulations.
© 2001 StockHouse Media Corp. |
