Two providers of people-related services that are well known to the corporate community, Korn Ferry International and Hay Group, are planning a wedding.

KF logoKorn Ferry, the country’s largest executive recruiter, announced today that it has entered a definitive agreement to acquire Hay, a $500 million firm that helps companies in the areas of people strategy and organizational performance.

Under terms of the agreement, the purchase price will be approximately $452 million, consisting of $252 million in cash and $200 million in Korn Ferry common stock.

HayGroup_Logo_BlueTab_RGBFor Korn Ferry, which reported $1.07 billion in revenue for its fiscal year ended April 30, the deal greatly furthers a transformation that’s been going on for a few years. Where before the evolution began the firm’s business was 100% talent acquisition (mostly executive search), with the acquisition of Hay Group half of its business will be in people advisory and leadership development, chief executive Gary Burnison tells CFO.

“For a CEO in any industry, it’s not just about attracting great people but also getting them to row together toward a common purpose,” Burnison says. “We don’t think there’s a global advisory that you can turn to when it comes to people that you can turn to like Goldman Sachs for financial advice or Bain for strategy. This is our opportunity to create a string of pearls, everything from strategy implementation to organizational design to workforce planning and assessment, hiring, development, compensation, and rewards.”

Perhaps so, but clearly Korn Ferry has elbowed its way into a most competitive landscape. It will be competing for business with management consulting firms like Bain and McKinsey, human capital consultants including Aon Hewitt, Mercer, and Towers Watson, and professional services firms including Deloitte, EY, KPMG, and PricewaterhouseCoopers.

A key differentiating element in Korn Ferry’s favor, according to Burnison, lies in the intellectual property area. “We’ve got millions of data points about companies and executives on the difference between being good and great,” he says. “Being able to link together real assessments, executive performance, and compensation data is very powerful.” Hay Group has been known primarily for its compensation and rewards consulting business.

Korn Ferry now faces the task of integrating Hay Group’s 3,000-employee business with its own 4,000-employee operation. “The key challenge is assimilating people and cultures, and we feel pretty confident that our firms share a similar cultural foundation, one that’s a meritocracy,” says Burnison, adding that he’s been talking with Hay Group leaders on and off since 2008 about combining forces.

Immediately following the closing of the transaction, Korn Ferry will combine Hay Group with Korn Ferry’s Leadership and Talent Consulting segment and brand the combined advisory business as Hay Group. Stephen Kaye, CEO of Hay Group, will continue to serve in that capacity.

The completion of the transaction, which is subject to the approval of Hay Group’s shareholders and receipt of antitrust clearance, is expected before the end of 2015. Korn Ferry says it will be accretive to earnings per share in the first full year after adjusting for purchase accounting deferred revenue write-offs, intangible asset amortization, retention bonuses, and restructuring and transaction costs.

In connection with the transaction, Korn Ferry and Wells Fargo have amended their credit agreement. The amended pact provides the firm with access to a new $150 million delayed draw term loan facility and reduces the borrowing capacity under Korn Ferry’s existing revolver from $150 million to $100 million. The amended facility will have a five-year maturity. Korn Ferry plans to partially draw down on this facility to finance a portion of the cash consideration.

On a current annual run-rate basis, Hay Group is generating EBITDA, adjusted for historical expenses that will not continue in the combined advisory segment, of $40 million. Korn Ferry is targeting annual cost synergies of at least $20 million within the first year of the deal’s closing, longer-term EBITDA margins for the combined segment of approximately 14% to 18%, and operating margins of 9% to 13%.

The targeted cost synergies relate primarily to operating efficiencies expected to be realized by leveraging technology platforms and reducing general, administrative, and real estate costs.

, ,

Leave a Reply

Your email address will not be published. Required fields are marked *