Korn / Ferry IPO Gets Mixed Reviews

By DEBORA VRANA

Aug. 24, 1998 12 AM PT

Korn/Ferry International, the world’s largest executive-search firm, revealed details last week about its plan to raise as much as $230 million from investors, but even with the new information, analysts are still divided on the wisdom of the deal.

Some question the viability of Los Angeles-based Korn/Ferry taking on the pressures of becoming a public company through its initial public offering in a highly cyclical business, but others say going public will help the firm survive in the increasingly competitive 21st century environment.

The $7.3-billion worldwide executive-search industry is fragmented, with the 10 largest of the 4,000 firms cornering 11% of the market. The industry depends heavily on the health of the economy. Demand for top executives is high when the economy is robust, but business can slow dramatically when the economy lags, making for widely uneven earnings that can rattle investors. That could cause trouble when Korn/Ferry becomes a public company, some analysts said.

But Matthew Lifkin, analyst with William Blair & Co. in Chicago, said the executive-search environment is changing as industry consolidation pushes dominant players to the forefront.

“This used to be a sleepy industry dominated by well-connected men from Ivy League schools making calls from behind mahogany desks,” Lifkin said. “But now the larger firms with better business models will be the consolidator in this fragmented industry, buying other firms so they can achieve growth even in an economic downturn. This move by Korn/Ferry is very forward-thinking.”

Indeed, Korn/Ferry, which has 384 consultants in 71 offices across 41 countries, will use some of the proceeds to help fund its new Internet-based search unit, Futurestep. Already, 23,600 candidates have filled out profiles with Futurestep since it was introduced in Southern California three months ago. The unit was launched in response to strong demand for middle management recruitment services.

The company sees the Internet as the future of job searching, and several other firms are competing for the online business.

Despite Korn/Ferry’s advancement in technology-based recruitment, some analysts say the dismal Wall Street track record by the only other public company in its industry does not bode well for Korn/Ferry.

New York-based LAI Ward Howell, known as Lamalie Associates until earlier this year, has seen its stock price plummet in recent months as its quarterly earnings have fallen short of expectations. Last week, the company said earnings for its second quarter ending Aug. 31 are expected to be 15 cents to 19 cents a diluted share, compared with 22 cents in the year-earlier period. The company was expected to earn 21 cents.

The company’s stock continued to slide all week and closed Friday at $8.31 a share. The company, which raised $24 million in an IPO in July 1997, saw its stock rise to a high of $23.25 in March, then drop below its $12 offering price.

“The thing has gotten killed,” said one investment banker familiar with the company. “It’s a little disconcerting for Korn/Ferry given LAI is the only publicly traded executive-search firm out there.”

But Korn/Ferry, a much larger company with a global presence, will have more shares outstanding and thus won’t be as vulnerable to Wall Street whims, others argued.

Analysts such as Lifkin also predict that Korn/Ferry, which has a history of paying out big cash bonuses to top-performing recruiters--66% of total revenue for fiscal 1998 went to compensation and bonuses--will need to switch to stock or options for it to be successful as a public company.

“They are going to have to send a lot more to the bottom line for investors if this is going to work,” Lifkin said.

Korn/Ferry filed Tuesday with the Securities and Exchange Commission to sell an unspecified number of common shares at an unspecified price. The company reported that net income totaled $5.24 million for the year ended April 30, down from $8.99 million last year. Revenue rose to $315 million in fiscal 1998 from $273 million the year before.

Underwriters for the deal will include Credit Suisse First Boston and Donaldson, Lufkin & Jenrette. Korn/Ferry shares would trade on the New York Stock Exchange under the symbol KFY.

In other IPO news last week, Santa Clara-based Terayon Communication Systems, which develops cable modem systems for two-way, broadband Internet access, sold its IPO at $13 a share on Monday, the low end of its expected range. Still, the stock was up 11% on its first trading day, closing at $14.44 a share.

And in what will probably be one of the most closely watched deals of the year, News Corp. made its formal filing with the SEC for the anticipated spinoff of part of Fox Entertainment Group Inc.

Fox Entertainment’s filing didn’t disclose how much it hoped to raise in the stock sale. Analysts, though, have estimated it could reach $3.5 billion--which would make it one of the biggest initial stock offerings in U.S. history.

Merrill Lynch & Co. will lead the team underwriting the deal.

Debora Vrana covers investment banking for The Times. She can be reached at debora.vrana@latimes.com.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

At a Glance

Company name: Korn/Ferry

Industry: Executive Search

Headquarters: Los Angeles

Employees: 384 consultants in 41 countries

Clients: 3,750 or 43% of the Fortune 500

Year formed: 1969

Revenue*

In millions