Adecco, formed in 1996, is one of the largest staffing companies in the world, with
operations in 52 countries, and was the first firm in the industry to be certified by ISO
(International Organization for Standardization). It has been able to outperform its rivals in
the staffing industry by focusing on several key factors:
· Diversification: Adecco’s diverse range of services and its evolution from staffing to HR
services helped the company sustain during economic downturns and maintain a stable
revenue stream.
· Gaining national market share: Adecco focused firmly on attaining a global presence with
a 20% market share in all major markets and leveraging its scale to win large contracts
and provide services to multinational companies.
· Technological innovation: Adecco was determined to attain quality/cost enhancement
through technological innovation.
· Acquisitions: Adecco focused its acquisitions on expanding its reach within the industry
and insisted on organic growth.
From an economic standpoint, Adecco's acquisition of Olsten would complement Adecco's
existing business model, help to increase the company's cost efficiency, and reduce costs by
leveraging combined resources and experience, allowing Adecco to remain competitive and
profitable in the staffing industry. Additionally, the acquisition would enable Adecco to expand
its geographical reach and service offerings. As a result, the acquisition of Olsten would
allow Adecco to remain one of the world's leading staffing companies and a significant player
in the industry.
From a strategic standpoint, the merger between Adecco and Olsten would expand
Adecco’s presence in the US market, allowing Adecco to bring a host of new services to the
table and become the sole global leader in the staffing industry. Olsten had a strong
presence in the healthcare staffing market, which would complement Adecco's existing
strengths. The combined operation of Adecco and Olsten would create the largest staffing
company in the United States, with the ability to provide even more services and a much
larger pool of potential staff to their customers. The acquisition would also give Adecco
access to Olsten's technology platforms and expertise in managing large-scale staffing
contracts.
William Olsten started Olsten Corporation in 1950. It is a home health care and staffing
company. In 1967, the company went public, and by 1998, it was the third-largest staffing
company in the world. Olsten's primary business strategy was to grow its expertise in
temporary staffing and gain a large share of the home healthcare market. By the year 1998,
about 27% of all of Olsten's revenue comes from health services. In the 1990s, Olsten
bought other companies to grow its staffing business inside and outside the US. Olsten
spent approximately $150 million on these purchases. Olsten faced the following challenges:
1. When the government cut reimbursements and managed care organizations cut
payments for home nursing, things got worse for Olsten.
2. Civil and Criminal investigations for healthcare business- When civil and criminal
investigations were added to these problems, the strategic situation for Olsten got worse.
For example, Olsten paid $4.5 million to settle a federal medicare fraud investigation. It
also pled guilty to other federal and state investigations involving its home health
division, incurring special charges of $61 million. These investigations made it hard for
the healthcare business to grow.
3. Expensive European Subsidiaries - Due to medical fraud, the cost of buying the
subsidiaries was more than expected. Olsten needed $100-150 million for the Sogica
earnout, $50-100 million for the Norsk earnout, and $15-20 million to complete earnouts
of a minority interest in Latin America.
4. Restructuring and Recovery plan for healthcare business – In 1997, Olsten's healthcare
business got a complete plan to reorganize and get back on its feet. As part of the
ongoing restructuring of business units, the company said on March 30, 1999, that it
would take a special charge of $46 million during the first quarter of 1999.
This high level of investment needs requires a lot of money, so by the middle of 1999,
Olsten's debt had grown from $461 millions in December 1997 to $746 millions.
The offer made by Adecco to Olsten of $ 11 per share for its staffing business was worth
contemplating for Olsten whose market price per share was $7.38 (as of December 1998).
Our estimate of total Enterprise Value of Olsten is $2007.44 millions.
This has been calculated as follows:
Starting with WACC, we needed Cost of equity which is calculated by taking Risk-free Rate
as US treasury Coupon Bonds 10 Year interest rate as 5.76% (Exhibit 15), Equity Beta of
Olsten as 0.98 (1998 - Exhibit 14), Market Risk Premium as 7.2%; Cost of debt as BBB
Rated Bonds 10 year interest rate at 7.14% (Exhibit 15); Equity - 80%, Debt - 20%, Tax Rate
- 33%. So, the WACC came out to be 11.21%.
For calculating Free Cash Flow to the Firm, we have used Pro Forma Financial Statement
given in Exhibit 13. EBIAT was earnings before interest and after taxes. We used the
formula: EBIAT + Depreciation - Capital Expenditure - Changes in Net Working Capital.
CAPEX has been calculated as the difference of Gross PPE of current and previous year.
Net working Capital has been calculated as sum of Operating Cash (Cash required for
operations), Accounts Receivable (Current Operating Asset), Other Operating Assets and
subtraction of Other non-interest liabilities (Current Operating Liabilities). Changes in Net
working Capital have been calculated as the difference of NWC of current and previous year.
FCFF has been discounted at Year 2000 with a sum of $694 millions and the present value
of terminal value at $1312 millions. This sum of PV of FCFF at $2007 millions is the
Enterprise Value of the Olsten.
Apart from the enterprise value of $2007.44 million the synergies that the acquisition would
bring for Adecco would be the increase in IT staffing business revenue as Olsten currently
has 13.4% share of its total revenue from IT business which is 8.2% higher that Adecco’s
share from the same business division.This would translate into a revenue synergy of
around $ 248 million (8.2% of $3.1 billion sales of Olsten in year 1998). Hence the total
reasonable bid price for Olsten from Adecco would be $2255.44 million (2007.44+248).
As of 1998,Olsten is having negative cashflow of $135 million and had a profit of $4 million
which declined from $93 million (combined healthcare & staffing business) in 1997 this deal
would enable Olsten to split their staffing and healthcare business enhance their focus on
improving their healthcare business which was undergoing a restructuring entailing a higher
amount of debt. Moreover Olsten was struggling to fund its completion of subsidiary takeover
across the globe which amounted around $ 200 million which was proving to be expensive.
The company’s reputation had taken a hit post the irregularity charges levelled against which
affected its borrowing capacity which was outlined in the fact that it was required to maintain
a debt-EBITDA ratio of at most 3.75 & EBIT/interest ratio of 3.
