by Jean-Marc Levy

Despite the worst business climate in years for venture capital and M&A, the HR outsourcing sector remains relatively healthy.

Let's face it: People who make a living by wheeling and dealing will remember 2002 as one of the bleakest years on record in the world of deal-making.

Venture-capital funding has plummeted to levels not seen in years. According to the National Venture Capital Association (NVCA), venture-capital financings in the third quarter of 2002 were down 26% from the second quarter, and down 65% from the third quarter of 2001. According to the NVCA, if the current trend continues, the industry will end 2002 at levels unseen since 1998.

In the world of Mergers & Acquisitions, the outlook isn't any rosier. According to MergerStat, for the first six months of 2002, aggregate M&A deal value stalled out at levels unseen for the broad M&A market since 1996.

What's a deal-maker to do? Well, for one thing, they can ask themselves if they operate in the right industry. Deal-making in the HR Outsourcing (HRO) industry, and more generally in the Human Capital Management (HCM) sector continues to be relatively healthy. While the overall level of activity is not as buoyant as in prior years, there is typically a buyer to be found for most sellers of HCM businesses.

The drivers of this activity are not surprising: HCM is still a very young industry. As discussed in earlier columns and through many sections of this magazine, large providers of HRO services are trying to extend their reach into the middle-market business space by broadening the range of services they offer, while smaller providers are trying to gain the scale and critical mass they need to break into the Fortune 1000 segment. The right merger or acquisition partner can accelerate either strategy dramatically.

Another driver is the continued trend towards specialization in the HCM sector, where industry focus or specialization in a specific service or in a process area continue to be important differentiators. The right acquisition can save a buyer years of critical internal development time. These drivers of M&A activity are neither short-lived nor temporary, and we expect the overall deal-making environment for Human Capital businesses to continue to be more active than the broader M&A sector.

DEAL-MAKER OF THE MONTH

Our deal-maker of the month is neither a major private equity player nor a mega-VC. Clark/Bardes Consulting (ticker: CBC), founded in 1967 by benefits specialists Robert Clarke and David Bardes, has grown to become one of the largest providers of compensation, benefits, and organizational consulting in the U.S.

Clark/Bardes serves over 3,500 organizations in three major practices (corporate, banking, and health care), and offers a broad range of services including compensation consulting, executive and director benefit planning, ownership and succession planning, insurance brokerage services, and physician practice management services-just to name a few. Revenues reached $230 million in 2001.

In order to offer this broad range of services, Clark/Bardes has been a very acquisitive business. The company has acquired close to twenty businesses since 1998. Some of these notable acquisitions include MCG/Healthcare, the largest benefits consulting organization serving the healthcare industry in 1999, Pearl Meyer & Partners, one of the largest executive compensation consulting firms in 2000, and Compensation Resource Group, a leading provider of design, implementation, and administration services for nonqualified executive benefit plans in 2000.

Most recently, in September 2002, Clark/Bardes continued to fill its shopping cart with its largest acquisition to date, and announced it had reached an agreement to purchase insurance broker Long Miller & Associates for $405 million in cash and stock. While the transaction had not formally closed as of this writing, the combination with its main competitor in the business-owned life insurance market, would make Clark/Bardes the undisputed market leader in this lucrative segment.

Pay attention. If past behavior is a good predictor of future activity, Clark/Bardes' shopping cart should continue to fill up over the next several months.