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Financial meltdown to hit headhunters

By Reuters Staff
September 25, 2008

lehman.jpgBy A.Ananthalakshmi – Analysis

BANGALORE (Reuters) – U.S.-based executive recruiters, already facing the heat of a global economic slowdown, could be a big casualty of the shakeup in the financial industry as battered Wall Street firms slow down on top-level hiring.

Korn/Ferry International Inc and Heidrick & Struggles International Inc — the only publicly traded executive search firms in the United States — could see profits erode further over the next few quarters as corporate America goes slow on white collar jobs.

The financial services sector accounted for about 19 percent of Korn/Ferry’s and 27 percent of Heidrick’s overall revenue in the latest reported quarter.

“We believe the slowdown in financial services will continue to affect the profit and loss statement of executive search companies in the third quarter,” Suntrust Robinson Humphrey analyst Tobey Sommer wrote in a note.

The financial sector has already shed 103,000 workers so far this year, according to Challenger, Gray & Christmas, a global outplacement consultancy that tracks daily job-cut announcements.

Recent financial industry events such as the bankruptcy of Lehman Brothers and Bank of America’s purchase of Merrill Lynch¬† could send job cuts in the sector this year past the 2007 record total of 153,105, John Challenger, chief executive of the consultancy, said in a statement this month.

The uncertainty in the sector suggests that even executive appointments will be jeopardized in the near future.

Some of Heidrick’s high-profile financial clients include Citigroup, Washington Mutual¬† and Friends Provident. Korn/Ferry’s clients include Freddie Mac and Barclays.

Korn/Ferry’s Chief Executive Gary Burnison said the financial industry is the most challenging sector for the company now.

“After the recent fallout on Wall Street, there has been a shift toward risk management, operations and infrastructure,” Burnison told Reuters.

He said the company had just placed a high-profile chief risk officer for one of the major banks in the news.

BIG HIT AS DEMAND SLOWS

The twin impact of the financial meltdown and a slowing U.S. economy will continue to hurt the two headhunters as firms cut back on expansion plans, leading to reduced opportunities for new jobs.

Suntrust’s Sommer attributes the slowdown in demand to lack of growth positions and lower compensation.

“As expansion slows, there is a negative multiplier,” he said, adding that this will trigger a slowdown in turnover of executives such as CEOs, CFOs and directors.

Korn/Ferry’s Burnison said the company continues to see a flat labor market at the executive level.

“We have also seen a lot of our clients take their executives and try to reappoint them around the world.”

“We are also seeing pressure on the compensation level,” Burnison added.

Heidrick and Korn/Ferry, whose rivals include privately held headhunters Russell Reynolds, Spencer Stuart and Egon Zehnder, have struggled with poor revenue growth and falling operating margins in the last few quarters.

Heidrick has seen a fall in the number of recruitments for at least two straight quarters.

In the recently reported quarter, Korn/Ferry’s margins fell to 11.5 percent from 13.5 percent in the year-ago period, while Heidrick’s margins dropped to 11 percent from 12.2 percent.

Shares of Korn/Ferry have lost about 11 percent this year, while those of Heidrick have fallen about 19 percent. The broader S&P 1500 Commercial & Professional Services Index has dropped about 7 percent.

Of the nine analysts covering Korn/Ferry, five have a “neutral” rating while three have a “sell” or an “underperform,” according to Reuters data.

Four analysts rate Heidrick “neutral,” while the same number rate it “sell,” “underperform” or “reduce.” Only one analyst rates the stock “outperform.”

Analysts say an appreciating dollar also could affect the two companies, both of which draw a considerable part of their revenue from outside the United States.

“In 2009… (the companies) could see as much as 10 percent to 15 percent impact on profits from appreciating dollar,” Sommer said.

In the latest quarter, Heidrick had about 49 percent of its revenue coming from outside the United States, while Korn/Ferry had 55 percent.

The companies, which have been betting on the impending retirements of baby boomers, will get no solace from the fact that many people are delaying retirement plans in the wake of the slowdown.

(Editing by Amitha Rajan)

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