Reality Check: How Wall Street Sees Korn/Ferry

Is the Whitehead Mann Acquisition Likely to Succeed?

I think [CEO Gary] Burnison’s sense is even if the
worst isn’t completely over, the worst of the worst has probably
passed and the longer-term trend is more likely to be positive rather than
negative. So this is not a bad time to take make a strategic acquisition if
the price paid is low enough to reflect a challenging operating environment. href="http://business.timesonline.co.uk/tol/business/movers_and_shakers/article6489217.ece">Whitehead Mann is a
blue-chip name but the firm was deteriorating due to a combination of the very
challenging operating environment and reduced funding by Och-Ziff, the firm
that href="http://www.telegraph.co.uk/finance/2946715/Whitehead-Mann-bids-mystery-backer-is-revealed.html">had taken it private almost
three years ago [Whitehead Mann href="http://www.realdeals.eu.com/sitesearch/page_8/?search=newco">went private in 2006 in a
management/private-equity-funded 26 million buyout].

In a professional services firm, the primary asset is the
people. Due to a variety of factors related to the combination of ownership
structure and demand environment, href="http://www.thisismoney.co.uk/markets/article.html?in_article_id=483150&in_page_id=3">some strong producers were leaving Whitehead Mann. Och-Ziff realized it wasn’t best positioned to
preserve or build the franchise; it was losing value. Korn/Ferry, on the other
hand, is in an excellent position to add value: It can take their consultants
and plug them into an established platform.

Hindsight will prove whether the deal was well timed or
premature. But the idea behind it was not surprising. Korn/Ferry did have a bit
of a hole in London relative to the rest of its international footprint, and
also a low level of exposure to financial services. In both respects, Whitehead
Mann plugs what was seen as a strategic hole. If the people at Whitehead Mann
contribute anything close to what they have in the past — and
obviously, the future could be different — this has the possibility
of being a good deal.

How Well, Compared to the Competition, Did Korn/Ferry Adjust to the Downturn?

Management, and Gary Burnison in particular, were far better
than average in foreseeing early signs of downturn, and putting in place a plan
to navigate through it. In fact, Korn/Ferry was the first company in the
employment space to discuss signs of a downturn, discussing it publicly as
early as 2007. They came up with a game plan and identified areas where they
could be more efficient, looked at where they could cut costs href="http://business.timesonline.co.uk/tol/business/industry_sectors/support_services/article6485387.ece">without hurting revenue,
and evaluated their personnel based on productivity.

Where they made a mistake, as almost everyone did, was in
misjudging the severity of the recession. They did not anticipate it would be
as brutal as it was. But they adjusted quickly and have done a good job in
terms of maintaining a strong balance sheet. href="http://www.bloggingstocks.com/2009/09/10/korn-ferry-rises-on-better-than-expected-q1-results/">They have not had huge losses,
which was something we saw under different management during the previous
downturn.

Evaluate Gary Burnison’s Leadership.

Gary is a good leader. He has a strong grasp of the
numbers, a sense of the cyclical nature of this business, and a good
perspective of how to add value. He came in during the depths of the last
downturn, when the company was in financial trouble. He was part of the team
that turned things around. In part because of that, he appreciated how much
revenue could decline. During this downturn, he has helped to materially
reduce expenses and has preserved the balance sheet.

What Are Korn/Ferry’s Strengths?

The key strengths are its franchise value, global leadership
position [Korn/Ferry is the largest executive search provider in the industry],
its geographic and practice diversity, and its strong balance sheet. Stability
in terms of its long-term plans and guidance from its board has also proven
helpful. Korn/Ferry has done well in terms of getting into ancillary areas
related to executive search, such as leadership development services. It was
one of the first to do that, and is now being emulated.

What Are Korn/Ferry’s Weaknesses?

It is a bit behind in terms of brand perception for the very
highest-end searches: CEO searches at Fortune 1000 companies. Most industry
observers view Heidrick & Struggles and Spencer Stuart as more
prestigious names.

In addition, as is the case with all top-end firms, there is
internal tension regarding the split of the economic profits — the
firm or the consultant. In the highest end of the executive search world,
consultants can be prima donnas who will demand to get paid even if the firm is
not doing particularly well. That’s a difficult management challenge
for almost every high-end professional services firm, not just Korn/Ferry.

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