August 11, 2015 – Twice this year Chicago-based headhunter DHR International has made a play for another recruiting firm, a growth strategy that runs counter to current trends in the executive search industry.
Though M&A frenzy has gripped local law and accounting firms in recent years, executive search has remained fever-free. Experts say the industry largely is split between boutiques and giants. The boutiques aren’t looking to grow. And the giants, like Chicago’s Heidrick & Struggles International and Spencer Stuart, have bypassed other search firms to buy businesses offering complementary human resources services.
That makes DHR’s recent deal to acquire CTPartners Executive Search in New York and its unsuccessful pursuit of Toronto-based Caldwell Partners International an anomaly. But Scott Scanlon, CEO of recruiting industry news source Hunt Scanlon Media in Greenwich, Conn., thinks the bet will pay off: “DHR’s moves this summer will definitely change the playing field among the top search firms. There’s now a new, significant rival.”
Similar to accounting, the search industry has its Big Five, including Heidrick, Spencer Stuart, Los Angeles-based Korn/Ferry International, and New York-based Egon Zehnder International and Russell Reynolds Associates. Publicly held Heidrick booked $494.3 million in net revenue in 2014, while privately owned Spencer Stuart had $698.3 million in fiscal 2014. Both dwarf DHR, which had $170.5 million in U.S. revenue last year, according to industry newsletter Executive Search Review.
But the Big Five are limited in how they grow by contracts barring them from scouring the ranks of their own clients for talent, says Caroline McClure, managing director of Scout Rock, a Baltimore talent consultancy and executive search firm. The longer a firm’s client list, the smaller the pool of companies it can recruit from. The potential for conflicts makes chasing growth through acquiring other search firms a loaded proposition.
Instead, the Big Five responded to the dramatic dip in work that accompanied the recession by seeking to diversify their revenue streams. In winter 2014, Spencer Stuart acquired Reya Group, a human capital consultancy in Shanghai. (A spokesman for Spencer Stuart declines to comment.) Heidrick purchased Senn Delaney, a corporate “culture-shaping” firm in Huntington Beach, Calif., in 2013 for $53.5 million, with another $15.0 million due if the unit meets three-year performance targets. This year the firm asked an executive vice president to spearhead growth in talent development consulting services.
“We want more linkage and more drive internally between the search business and the (leadership) assessment and succession business,” Heidrick CEO Tracy Wolstencroft said in a July 28 call with analysts.
Heidrick may be considering more acquisitions, too, Scanlon says. The firm’s bankers increased its revolving credit by a third to $100 million in June, with the possibility of raising it again to $150 million.
New offerings from search firms include leadership training and proprietary recruitment and assessment tools, says Bhavin Patel, a director at merchant bank Clearsight Advisors in Tysons Corner, Va. “All the larger firms are trying to figure out how to pivot and do more interesting acquisitions outside their core suite of services.”
DHR offers some expanded services, too. The firm developed a proprietary tool 18 months ago to help companies assess a candidate’s leadership style. But such tools are ancillary, DHR CEO Geoff Hoffmann says. “They’re not margin enhancers or even revenue drivers.”
So Hoffmann has pursued other executive search firms. DHR first coveted CTPartners for its financial and professional services practices and its global footprint, the better to serve multinational clients such as New York-based 21st Century Fox and North Chicago-based Abbott Laboratories. But by the time the firm finalized a deal in July for 14 offices and 210 of CTPartners’ employees, much of the struggling firm’s top talent already had departed. Heidrick added six recruiters from the wreckage. William Blair analyst Timothy McHugh, assuming each headhunter averaged $2 million in revenue, wrote July 1 that Heidrick “could be effectively capturing 5 to 6 percent of the revenue from CTPartners.”
But the largest chunk of CTPartners’ $172.5 million in revenue will go to DHR, Hoffmann says. “The biggest attraction for us was the European footprint, which we were able to secure largely intact,” he says, minus the managing partner for Western Europe, who left for Heidrick.
DHR targeted Caldwell Partners for similar reasons: an attractive insurance practice and its presence north of the border. In a July 14 letter, though, Caldwell Chairman Edmund King rejected the offer. A third of Caldwell’s shares are held by management and partners, he wrote, and the recruiters “made it clear that they would not be willing to be part of a firm controlled by DHR.”
DHR, which had purchased about 5 percent of Caldwell, fired back with a letter from DHR Chairman David Hoffmann, Geoff Hoffmann’s father. Caldwell’s board owed it to shareholders to explore DHR’s willingness to pay a premium on the firm’s trading price, and the firm’s assertion that recruiters might leave if DHR pursued a deal was “troubling and unacceptable.” But Caldwell adopted a poison pill, and on July 30 DHR agreed to sell its shares to Caldwell and stop pursuing a sale for two years. Both companies promised to refrain from poaching each other’s recruiters for the same period.
But 24 months isn’t a long time, Scanlon says. It may be a lull just long enough for DHR to integrate the professionals from CTPartners and for Caldwell to negotiate a better selling price. “We may not be seeing the ending of this story just yet.”
Crain’s Chicago Business, by Claire Bushey