Our report examines UK merger and acquisition (M&A) activity across the recruitment sector during 2022. Overall, it was a positive year for M&A in the sector, even during difficult periods for businesses in relation to high inflation and interest rate rises.
106 transactions involving UK recruitment companies took place during 2022. This represents an increase on the 92 deals completed in the 12 months to 31 December 2021, although this period was significantly impacted by a peak in deal volumes in March 2021 as a result of the anticipated, but ultimately not enacted, increases in UK capital gains rates.
Deal volumes in both Q2 and Q3 2022 were greater than the comparative periods for each of the previous three years. A key driving factor behind this was economic recovery.
The largest volume of transactions in the industry included general recruitment firms and those specialising in the IT, technology and digital sectors.
Since the pandemic there has been a shift in candidates’ attitudes on where and when they are willing to work. Candidates are seeking both hybrid and flexible working and are increasingly willing to move jobs if this is unavailable at their current workplace.
M&A activity involving general recruitment firms has increased in popularity in recent years. It would appear that having a broader and more diverse service offering provides resilience against an ever-changing and disrupted market.
IT, technology and digital
The technology sector was one of the hardest hit in 2022 by economy wide shocks such as the Ukraine crisis, inflation and rising interest rates. This has resulted in many companies streamlining workforces, but also an upsurge in the number of recruitment businesses employing digital transformation strategies or acquiring businesses with a specialism in IT, technology and digital.
Glassdoor reported that 40% of the best places to work in 2022 were tech employers. The sector is also constantly adapting and growing, which has driven the continuous evolution of job roles. There is high demand for these positions, and in an industry with historically high staff turnover, this presents opportunities for recruitment companies in the space.
Listed company analysis
Share prices in the recruitment sector decreased by 26.6% over the 12 months to 31 December 2022, following an increase of 32.6% in the 12 months to December 2021. This was predominantly due to challenging economic conditions, instead of companies’ poor performance.
UK vacancy and unemployment rates
Following a significant increase in the UK vacancy rate during 2021, overall vacancies began to decrease at the end of 2022. Vacancy rates remained high in the human health and social work sector, which contributed to the high level of transaction volumes in this sector.
The continuation of the high vacancy rate and low unemployment rate is indicative of the strength of the employment market and demand for industry recruitment and placement services.
In addition, labour productivity increased in 2022. When labour productivity is high, fewer new employees are generally required because business targets are more likely to be achieved by existing staff. This increase represents growth in gross value added (being the estimate of the volume of goods and services produced by an industry) as well as a reduction in the number of hours worked. This was particularly prevalent in manufacturing, finance and insurance, construction and IT, which all had the biggest positive industry contribution to productivity growth.
Transaction structuring, private equity and EOTs
Private equity involvement remained strong in 2022, with a new trend for the year being a rise in Employee Ownership Trusts (EOT) buyouts. There has also been an increase in private equity investment in recruitment specialists who can serve the ESG and renewable sectors. And during 2022 there has been lots of available money in circulation amongst private equity firms, and there are many private equity buyers and trade buyers with funds to deploy.
Despite high interest rates at present, there is an optimistic outlook in respect of private equity involvement based on the fact that high interest rates in 2000 did not deter private equity backed acquisitions in the sector.
There has been a rise in the number of EOT deals in 2022, although it is worth noting that EOT deals still represented less than c.5% of transactions in 2022. The popularity of these schemes may increase in the next couple of years, but many only view an EOT worth considering if all the current members wish to exit from the business and there are limited alternative exit options.