You and your team have just been hired by a privately owned company that is considering several strategic options. ITStaffing, Inc. ("ITS" or the "Company") is one of the fastest growing information technology (IT) staffing firms in the United States. The company matches highly skilled IT professionals with temporary assignments and full-time positions across a broad range of large- to medium-sized corporations. During the past ten years, ITS has successfully scaled its operations across multiple offices, resulting in extraordinary revenue growth. The Company is owned by its three founders, David (the Chief Executive Officer), Susan (the Chief Operating Officer) and Andy (the Chief Financial Officer).

Over the past year, Andy has expressed an interest in cashing out of ITS in order to pursue other opportunities. Although David and Susan remain highly committed to the business, they have been approached by several strategic buyers in recent years, and, at the right price, would consider selling as well. Although an investment banker has not been hired to sell the company and no formal offer has been made, they are curious what their company is worth. All of the potential strategic buyers are large and well capitalized enough that they could buy ITS for cash.

ITS Background

After working for 12 years in the staffing industry and observing an ever-increasing demand for highly skilled IT professionals, David decided to start his own firm almost a decade ago. Joining him was his former colleague Susan, and his friend Andy, who had been Chief Financial Officer at another privately held service company before joining David and Susan. Starting from a 900 square foot office in Coconut Grove, Florida, David, Susan and Andy grew their business to 16 offices in major metropolitan areas across the U.S.The company is now one of the leading IT staffing firms in the nation, providing clients with a range of highly skilled IT professionals on a project and full-time basis. ITS has distinguished itself in the industry by being able to consistently recruit the highest quality IT professionals and match their unique skills to meet a client's most pressing IT needs, as well as deliver faster placement results and provide a more consistent level of service than their competitors. Furthermore, since inception, ITS has focused on building a scalable business model for expansion into new markets and has been able to successfully open new offices with limited capital investment. During the company's recent history, it has successfully scaled its operations, with revenue growing from $9.4 million in 2012 to $203.3 million in 2020 (a compound annual growth rate of 46.9%). EBITDA was $38.6 million in 2020. Despite economic uncertainty because of COVID-19 and its impact on the economy, including a recent decline in temporary staffing penetration, ITS has continued to grow rapidly, with revenue increasing at a compound annual growth rate of 17.0% since 2017. More impressively, as of 2020, the company's EBITDA margins were more than double those of any of its public comparable companies.

Industry Highlights

In the U.S., the staffing industry is large and expanding, generating revenue of over $97.0 billion in 2019, $87.4 billion from temporary and contract staffing and $9.7 billion from search and permanent placement services. The staffing industry is anticipated to grow faster and add more new jobs over the next decade than almost any other industry in the U.S.

The staffing industry has been progressively shifting towards higher skills and higher paid positions. Many industry forecasts predict a shortfall of qualified workers in the IT, nursing and physician fields. Having said this, a key risk for staffing companies is overall economic growth, as staffing is highly correlated to GDP. During periods of low demand, pricing becomes increasingly competitive and gross margins typically decrease. Still, IT is one of the strongest segments in the staffing industry. IT is also the largest segment in the professional staffing space, accounting for approximately 43% of all professional staffing revenue.

Over the past two decades, the web has become critical to the operations of many businesses. For many companies, it is uneconomical to hire full-time IT staff, and relying on temporary staffing presents a better solution.The IT staffing segment has remained strong, driven by broad investment in IT by corporations, new technological advancements (including Zoom) and a shortage of qualified workers with IT skills.IT staffing revenue increased by 13% in 2020 and is expected to increase by 12% in 2021.

Although there has been a fair amount of consolidation recently, the IT staffing segment remains highly fragmented. The three largest global temporary staffing firms have acquired three of the largest IT temporary staffing firms in the United States in the last two years.This trend is expected to continue for at least the next several years.

Other Information About the Owners and the Company

In 2019 and 2020, the founders issued dividends of $10.0 million and $11.9 million, respectively.If ITS is not sold, it is anticipated that the Company would continue to issue similar dividends going forward.

Recently, David, the CEO, and Andy, the CFO, have had conflicting opinions regarding ITS's business outlook. While David is optimistic that margins will remain high, and even expand, Andy is concerned that increasing competition and ITS's expanding branch network and a potentially weaker U.S. economy may begin to place pressure on the Company's margins.Similarly, David and Andy have had conflicting opinions regarding the Company's top line (revenue) growth.While Andy sees growth slowing given increased competition, David is optimistic that the company can continue to expand rapidly. Susan, the COO, has views that are more consistent with those of David.

The ownership of the Company is divided as follows: David, the CEO, owns 50% of the shares and Susan, the COO, and Andy, the CFO, each own 25%.

Determining Fair Value

There is an accompanying spreadsheet, "Final Valuation Project - ITS.xls", the contains the following information:

• Historical income statements and capital expenditures for the years ended December 31, 2017-2020.
• Projected income statements and capital expenditures for the years ending December 31, 2021-2024.
• Historical balance sheets for December 31, 2018 - 2020.
• Selected financial information regarding potentially comparable publicly traded companies.

Using this information (and this information alone), you should determine a fair value of the equity of the Company's equity using a range of $10.0 million (e.g., $100.0 - 110.0 million, this range shared for illustrative purposes only). In determining fair value, you should use two valuation approaches:

• Comparable company analysis - Determine which of the comparable companies are most comparable to ITS based on financial and non-financial criteria. Once you have determined which companies are most comparable, estimate the value of ITS's equity by using your best judgement of the appropriate EBITDA multiples for ITS based on the multiples of the most comparable companies. While the range of these multiples is important, typically the mean and, more often, median multiple is most informative in determining fair value.

• Discounted cash flow analysis - Estimate free cash flow for the four years detailed in the forecast (2021 - 2024) and also a terminal value using both methods we discussed in class (an EBITDA multiple based on the analysis above as well as a perpetual growth model). Determine the company's appropriate weighed average cost of capital by using the most comparable companies' unleveraged betas and then re-leveraging these betas for the capital structure of ITS. This should be relatively simple in this instance, as ITS has no financial debt.You may ignore the fact that it has cash on its balance sheet (although this cash should get factored into the company's fair value of equity, as explained in the next paragraph).

For both of the analysis above, you should calculate the fair value of equity. calculate the fair enterprise value and then, as usual, subtract off the net debt (short-term debt plus long-term debt, less cash). But in the case of ITS, "net debt" is negative, i.e., they have no financial debt on their most recent balance sheet, and they have $14.6 million of cash. As a result, the owners own a business and also $14.6 million of cash. In contrast to the examples where we had to subtract off the positive net debt to back into equity value, for ITS we add the cash to the enterprise value to determine the fair value of equity. The easiest way to think about it is to consider that if you owned the stock of a company with no operating business and the company had $14.6 million of cash, it would be worth the sum of the business value (zero) and the cash in the bank ($14.6 million).

Your Assignment and Deliverables

Your assignment is as follows:

1. Estimate the fair value of the company by performing a comparable company analysis.In determining which companies are most comparable, think about qualitative items like geographic and market segments, as well as quantitative measures such as size (in terms of revenues), profit margins, return on capital, leverage, etc.

1. Estimate the fair value of the company by performing a discounted cash flow analysis per the instructions above.

1. Combine these two analyses to assess what you think the fair value of the equity is within a $10.0 million range

1. Push yourselves to think about the full range of alternatives. What would the "value" of doing nothing be to each owner over time?How does this compare to the value of selling today? What are the risks of each of these? Given that there are differing motivations and views of the business, are there alternatives that can allow different parties to achieve different goals? In evaluating this last point keep in mind that there is cash on the balance sheet, and, because the company has no existing debt, banks and other lenders might lend the company funds. The current market for bank debt for companies like ITS suggests the Company could borrow up to 3x EBITDA at a pre-tax cost of interest of approximately 6.00%

The financial information referred to on page 3 is contained in a separate Excel spreadsheet. On the pages following this memorandum are brief descriptions of the potentially comparable public companies you should consider.

Potentially Comparable Public Companies[2]

Adecco S.A. - Adecco provides human resource solutions to businesses and organizations worldwide. It offers temporary staffing, permanent placement, secondment, outsourcing, outplacement, training and consulting services. Adecco provides general staffing services primarily in the office and industrial areas; and professional staffing services in the areas of information technology, engineering and technical, finance and legal, and medical and science, as well as in the areas of sales, marketing and events.The company was founded in 1957 and is headquartered in Glattbrugg, Switzerland.

CDI Corp. - CDI provides engineering and information technology project outsourcing solutions and professional staffing services primarily in the US, UK and Canada. It operates in four segments: ES, MRI, Anders and ITS. The ES segment provides engineering, design, project management, staffing and outsourcing solutions to oil, gas, refining, alternate power, power generation, chemicals and heavy manufacturing. The MRI segment operates as a global franchisor that does business as MRINetwork and provides the use of its trademarks, systems, training and support to its franchisees who engage in the search and recruitment of technical, professional and managerial personal. The Anders segment provides contract and permanent placement in the areas of architecture, building services, interior design, surveying and town planning. The ITS segment offers various IT related services, which include staffing augmentation, permanent placement, outsourcing and consulting. The company was founded in 1950 and is based in Philadelphia, Pennsylvania.

Hays plc - Hays operates as a specialist recruiting company in the UK and internationally, providing temporary and permanent staff to various sectors, which include accountancy and finance, construction and property, information technology, sales and marketing, banking, contact centers, education, healthcare, human resources, purchasing and many others. It is located in London, UK.

Hudson Highland Group Inc. - Hudson Highland provides professional staffing and talent management solutions. It helps companies in recruiting and developing employees for professional level functional and managerial positions on a permanent and contract basis. It also provides candidates with specialized skills in accounting, finance, legal and information technology. It offers candidate assessment, competency modeling, leadership development, performance management and career transition services.It serves small to large companies and government agencies in Europe, Australia, New Zealand, the Americas and Asia.The company was founded in 2003 and is based in New York, NY.

Kelly Services, Inc. - Kelly provides workforce solutions to various industries worldwide.It offers trained employees in word processing, data entry, and as administrative support staff, staff for contact centers, technical support hotlines, and telemarketing units; technicians for the technology, aerospace and pharmaceutical industries; engineering professionals across various disciplines,; professionals for corporate finance departments, accounting firms, and financial institutions; talent management solutions to the U.S. and other governments and agencies; healthcare specialists and professionals for various health care sectors, and information technology specialists. In addition, it provides legal professionals, contract administrators, compliance specialists, and legal administrators; entry level to PhD professionals to scientific and clinical research industries; chefs, portions and hospitality representatives. It was founded in 1946 and is headquartered in Troy, Michigan.

Kforce Inc. - Kforce provides professional and technical specialty staffing services and solutions to corporations, the federal government, state and local governments and small to medium sized companies in the U.S. It operates in four segments: Technology (Tech), Finance and Accounting (FA), Health and Life Sciences (HLS) and Government Solutions (GS).The Tech segment offers temporary and permanent placement services for systems/applications programmers and developers, senior level project managers, systems analysts, enterprise data managers and e-business and networking technicians. The FA segment provides services to taxation, budget preparation, mortgage and loan processing, financial reporting, cost analysis etc.The HLS segment offers clinical research associates to the pharma industry. The GS segment provides technology, finance and accounting professionals to the federal government primarily as a primate contractor.Kforce was founded in 1994 and is headquartered in Tampa, Florida.

ManpowerGroup -ManpowerGroup provides employment services in the Americas, Europe, the Middle East, Africa and the Asia Pacific region. The company offers permanent, temporary and contract recruitment services; employee assessment and selected services; and training, recruitment process outsourcing, managed service solutions, consulting and outsourcing services. It also provides professional services to public accounting firms in the areas of risk advisory, tax and accounting; and a range of specialized information technology staffing and project implementation services, including website development and integration, application programming and development, client/server development, systems software architecture and design and systems engineering and systems integration. The company was founded in 1948 and is headquartered in Milwaukee, Wisconsin.

On Assignment - On Assignment is a diversified professional staffing firm that provides flexible and permanent staffing solutions in the U.S., Europe, Canada, Australia, New Zealand and Bermuda. It operates in four segments: Life Sciences, Healthcare, Physician and IT/Engineering.The Life Sciences segment provides locally based contract life science professionals in biotech, pharma, food and beverage, medical device, personal care and environmental industries. The Healthcare segment offers locally based and traveling contract professionals that include nurses, specialty nurses, health information management professionals, dialysis techs, surgical techs, imaging techs, medical techs, phlebotomists, as well as dental professionals.The Physician segment provides short and long-term physician search services. The IT/Engineering segment delivers consultants with a expertise in specialized IT, and hardware and software engineering, as well as mechanical, electrical, validation and telecom engineering. The company was founded in 1985 and is headquartered in Calabasas, California.

Randstad Holding NV - Randstad provides staffing and HR resource services in the Netherlands and internationally. Its staffing services comprise temporary staffing, permanent placement and specialties for specific segments. The company also recruits supervisors, managers, professionals, interim specialists and consultants with qualifications for middle and senior management positions. Further, the company provides HR solutions and managed solutions, such as HR project management, HR management and HR consultancy services. It has operations in Africa, Asia, the Middle East, Australasia, Europe, North America and Latin America. It was founded in 1960 and is headquartered in Diemen, the Netherlands.

Robert Half International Inc. - Robert Half provides staffing and risk consulting services in North America, South America, Europe, Asia and Australia. Its Accountemps division offers temporary staffing in the fields of accounting, tax and finance. Its OfficeTeam division places temporary and full-time office and administrative personnel ranging from word processors to office managers. Its Finance & Accounting division focuses on the placement of full-time accounting, financial, tax and banking personnel.Its Technology division specializes in the providing IT contract consultants and placing full-time employees in areas ranging from multiple platform systems integration to end-user support, including specialists in programming, networking, systems integration, database design and help desk support. It's Legal division places temporary and full-time employees in attorney, paralegal, legal administrative and legal secretary positions. It also has two other divisions - Management Resources which focuses on senior financial positions and Creative Group which focuses on advertising and marketing, including web design. The company was founded in 1948 and is headquartered in Menlo Park, California.

Robert Walters plc- Robert Walters provides professional recruitment services on a permanent, contract and interim basis primarily in the U.K., Europe, Asia Pacific, the Americas, and South Africa. It offers recruitment services in the areas of accounting and finance, banking, engineering, operations, legal, information tech, sales and marketing, supply chain, procurement and logistics, human resources, secretarial and support and administration. The company also provides recruitment process outsourcing services, consultancy, and payroll services. It serves clients in the financial, commercial and industrial sectors. It was founded in 1985 and is headquartered in London, the U.K.

[1] This case study is based on a similar case developed by Houlihan Lokey for use in the national ACG Cup, a case study competition designed to give students real world experience with mergers and acquisitions. Houlihan Lokey is an international investment bank with expertise in mergers and acquisitions, capital markets, financial restructuring and valuation.

[2] All of the information necessary to perform your analysis is contained in this case study and the associated Excel spreadsheet.