Market Overview

The Federal Reserve has recently signaled that interest rate hikes may end soon; however, recent inflationary pressures have been higher than estimates, fueling some debate as to how soon that end may come. Recently released minutes from the FOMC’s March 28 meeting, where rates were hiked for the 15th straight time, show the committee members expressing concerns about tightening the short-term rates too much. However, the minutes also revealed the Fed’s future decisions would rely more heavily on data about inflation and economic activity.

Meanwhile, jobs reports and the CPI show improved sentiment about the state of the economy coupled with higher inflationary pressure than expected. The most recent weekly jobs report showed the number of people signing up for jobless benefits falling sharply, signaling employers are increasingly optimistic about the business climate. In addition, the March CPI jumped 0.4 percent, up from a 0.1 percent rise in February, which was in line with estimates. However, the core CPI rose 0.3 percent in March, also up from 0.1 percent in February and above consensus estimates of 0.2 percent. The recent increase represented the biggest one month jump in the core CPI since March 2005. The growing economy and improving job market, coupled with higher core inflation and ever increasing oil prices, will have the Fed taking a closer look at inflationary pressures before ending rate hikes after May’s widely expected increase to 5.0%.

Merger Overview

The improving labor market has had a beneficial effect on the staffing industry. Shares of staffing companies have been on the rise after employment services company Manpower Inc. released better than expected first-quarter net earnings and an analyst predicted Monster Worldwide Inc. would post strong first-quarter results. Coupled with public company performance has been increased interest in staffing companies in the market, with Q1 staffing deals totaling forty-one deals completed and three pending as of the end of March. That compares with twenty completed and two pending in Q1 2005. Most of the deals involving staffing companies were strategic acquisitions by public companies, with two of the more notable being the $810 million acquisition of Deutscher Industrie Service AG by Adecco SA announced in January and the $60 million Kforce Inc. purchase of Pinkerton Computer Consultants Inc.

The above exhibit illustrates median days outstanding for the various cash cycle components over the last twelve months for our sample of publicly traded middle-market companies.  The cash cycle begins when businesses pay cash for materials and other inputs and ends when cash is collected from receivables.  A positive number means the firm pays cash to suppliers of inputs before collecting cash from customers.

As illustrated in the Exhibit, industrial product companies show an average cash cycle of 118 days, which is the longest among the tracked categories.  Days of inventory outstanding is the main driver expanding the cycle for these companies, as many of these firms manufacture products to replenish stocks.  Software and business services companies show shorter cycles of 49 and 38 days, respectively.  The main component expanding these cycles is days of receivables outstanding, which is in line with the expectation that business services and software companies usually do not carry significant inventory, resulting in shorter days outstanding compared to industrial product firms.