The $452 million purchase of Hay Group is not only the largest acquisition Korn/Ferry International has made to date, it’s one that took eight years to finalize.
The Century City executive search firm completed its deal with Hay, a similar firm based in Philadelphia, early last week.
“This is something I’ve had my eye on for a long, long time,” said Korn Ferry Chief Executive Gary D. Burnison. “My first overture with them was eight years ago and then in the spring this year I reached out again and things really got intense by summertime.”
If preliminary reactions are any indication, it appears the deal was worth the wait.
Analysts praised the acquisition as it advanced Korn Ferry’s goal to push into new segments of the industry. The company’s investors also welcomed the news as the deal drove shares up nearly 6 percent last week to close at $38.18 on Dec. 2, one day after the announcement.
Even more good news for Korn Ferry investors could come Dec. 9, when the firm is slated to announce its results from the last fiscal quarter, ended Oct. 31.
Analysts predict the firm will boast a net income of $25.6 million (53 cents a share) on $274 million in revenue. If the consensus estimates hold true, the company would surpass the net income of $25.4 million (52 cents a share) it reported for the same quarter last year.
Tobey Sommer, an analyst at SunTrust Robinson Humphrey in Atlanta who tracks Korn Ferry, said he anticipates the deal will increase the firm’s annual earnings before interest, taxes, depreciation and amortization by $91 million within two years. That would add quite a bit of padding to the company, which reported its Ebitda at $152 million during the last fiscal year, ended April 30.
“This acquisition is transformative, in our eyes, creating a senior talent advisory company built upon core executive search but capable of offering services ranging from succession planning to executive coaching and from compensation database services to recruitment process outsourcing and talent evaluation,” Sommer wrote in a Nov. 23 report.
Korn Ferry has about 4,000 employees and Hay 3,000, Burnison said.
Tough times
When Lester B. Korn and Richard Ferry co-founded their firm in 1969, they specialized only in helping businesses find top talent to serve in executive positions. And in the following decades, executive searches continued to be Korn Ferry’s bread and butter. The company became the largest executive search firm in the world by the 1980s – a title it still holds today.
Its success, though, doesn’t seem to come as much of a surprise to the co-founders – even as Korn Ferry generated more than $1 billion in sales for the first time in its history last fiscal year.
The firm has certainly had its tough times, however.
In the aftermath of the Great Recession, for instance, its revenues fell below $600 million while net income sat at $18.7 million during its fiscal year ended April 2010, its hardest year.
“Revenue is cyclically sensitive and can turn quickly,” Mark Marcon, a senior analyst at R. W. Baird & Co. Inc. in Milwaukee, said in a Dec. 2 report. “During periods of economic contraction – or potentially tepid economic growth – demand for executive and midlevel search services is reduced, creating significant negative leverage. With the majority of its business from placement activities, the company’s revenue is particularly responsive to changes in the general economy.”
New focus
But as Korn Ferry has emerged from the most recent economic downturn, Burnison said that his firm has increased its focus on diversifying into new areas.
This month’s acquisition of Hay, he added, illustrates the firm’s efforts, although it’s only one of about 10 deals the firm has made in recent years.
The ultimate goal, Burnison said, is to rely less on the executive search business and bolster sales through offering advisory services to companies. And Hay, which specializes in that area, puts that plan on a much faster track.
“Before the acquisition, the advisory piece would have been a little less than 25 percent of our business,” Burnison said. “This actually more than doubles the advisory capabilities of the company.”
SunTrust analyst Sommer said one key service Korn Ferry will now be able to offer is a database that can help employers determine how much to pay employees.
“If you’re a $200 million biotech firm and you’re trying to hire some finance people in Boston, this compensation service will tell you how much you need to pay as a $200 million biotech firm for finance people in Boston,” Sommer said. “That’s something they weren’t involved in before.”
Indeed, Burnison said half of Korn Ferry’s business, with the addition of Hay, will be dedicated to advisory services, such as the compensation database. As a result, the company should be better suited to weather any future economic downturns.
“The services we’ve gotten into are less cyclical than the executive search business,” he said. “This changes everything.”
