Staffing Firm Inks $600 million Deal

Staffing firm On Assignment Inc. grew more than 30 percent in 2011, but that’s nothing compared to what its latest move will do. The Calabasas company will more than double in size to $1.3 billion if regulators and shareholders approve its bid to acquire the country’s sixth-largest information technology staffing company in a deal worth $600 million. The acquisition of Virginia-based Apex Systems Inc. also will plant On Assignment — with roots in health care and physician placement — firmly in IT, making it the second-largest player in the fast-growing $22 billion IT placement industry. With the acquisition, the company — whose niche has been high-level placements in health care, IT and biotech — will now derive 75 percent of its revenue from the IT sector, including the much larger middle tier of the business, which has been growing at a rate of 12 percent a year. Health care staffing, the company’s roots, will now account for just 13 percent of total revenue. Analysts hailed the acquisition and shares of On Assignment jumped 27 percent the day after the announcement on March 20 to $17.32 a share. “It’s very smart strategy,” said Mark S. Marcon, senior analyst at Robert W. Baird & Co. “It more than doubles the size of the company, it makes the company much more focused on IT, which is a good thing, and it’s highly accretive to earnings.” Analysts said the deal will raise 2013 earnings per share by 35 percent to $1.15 a share from 84 cents a share. On its own, On Assignment earned $24.3 million for the full year 2011, or 66 cents a share, reversing a $9.9 million accounting-related loss from the previous year. The company finished 2011 with $597.3 million in revenues, up 37 percent from the previous year. • Location: Calabasas • CEO: Peter Dameris • Employees: 1,281 • Market Cap: $652.63 Million • PE (ttm): $27.25 • EPS (ttm): 64 • Closing Price: (as of Mar. 28) $17.44 But the acquisition is not without some risks. “Any acquisition that doubles the size of the firm is obviously risky,” Timothy McHugh, an analyst with William Blair & Co., wrote in a March 21 research note. Because Apex is in a lower margin, high volume business, the acquisition could also put some pressure on margins, he said. It also exposes the company to the more volatile financial services industry, in which Apex has a significant presence, while putting the company in more direct competition with other large IT staffing companies such as Manpower. What’s more, the deal — financed with $540 million in bank loans — will significantly increase the combined company’s debt load. McHugh said the leverage will total 3.75 times the companies’ combined earnings before interest, taxes, depreciation and amortization, which he said was relatively high for a staffing company. Despite those potential negatives, he said the benefits “meaningfully outweigh the risks.” Under the terms of the $600 million deal, expected to close in May, On Assignment will acquire all of Apex Systems’ equity and retire the company’s $95 million in debt. The purchase price is made up of $383 million in cash, and newly issued stock worth $217 million. On Assignment is financing the deal with a $540 million credit facility from Wells Fargo Bank, N.A., Bank of America Merrill Lynch and Deutsche Bank Trust Company Americas. The credit facility provides for a $50 million revolving credit facility and a $490 million term loan. Because the transaction is being treated as an asset sale, it is expected to result in $14 million in annual cash tax savings over the next 15 years. The deal was more than two years in the making, said CEO Peter Dameris. No stranger to the opportunities in IT, Dameris was formerly chairman and CEO of Metamor Worldwide Inc., an international IT consulting company. Dameris and On Assignment started wooing Apex in early 2010 after identifying it as one of the top IT staffing companies with an annual compounded growth rate of more than 30 percent. “We looked at other companies,” Dameris said, “but Apex was the sixth-largest and the best of breed,” he said. One of the most attractive things about Apex, he said, is that its business does not overlap with that of Oxford Global Resources, On Assignment’s IT and engineering staffing business, which is focused on high-end positions such as database designers and enterprise software developers. Oxford charges its clients an average of $116 an hour for these professionals. Apex, with $700 million in revenue last year, has staked out a niche in the middle tier of the business, specializing in placing network engineers, application developers and help desk personnel, for whom the company bills an average rate of $60 an hour. “The businesses are highly complementary,” Dameris said. And because the two firms don’t compete for clients or overlap, the deal is not expected to result in any layoffs. By the same token, the Apex acquisition puts On Assignment into a much larger segment of the IT staffing business, McHugh said, expected to grow to $22.7 billion this year. It is still a highly fragmented business, but the deal will make On Assignment the second-largest player, according to the companies. Even as overall employment growth remains stagnant, IT jobs are in high demand, analysts said, especially in temporary assignments. With the pace of change in technology accelerating, companies are more likely look for project specialists than commit to a large, permanent staff. “It makes sense for companies to have a core internal group that’s supplemented with specialists,” Marcon said. Analysts said On Assignment got a very good deal on Apex, which is growing more than 30 percent a year. By the same token, the three founders of Apex have little to complain about, McHugh said, walking away with more than $500 million in cash and stock. Dameris was pleased with the deal. “This transaction was a negotiated process,” he said. “There was no auction conducted for the sale. It permitted us to put together a thoughtful transaction.” He said revenue and cash flow generated by the combined companies will allow On Assignment to pay down a substantial portion of the new term loan over two years.