At The Head Of The Headhunting Pack

Heidrick & Struggles' sector will only continue to expand as baby boomers retire

These are nerve-wracking times for CEOs. Last year, more than 28,000 top executives lost, left, or changed jobs, up 68% from 2005, according to Liberum Research. But turnover makes at least one chief executive happy: L. Kevin Kelly of recruiter Heidrick & Struggles International Inc. "It's a buoyant market," he gushes. "There's a huge demand for talent."

Change in the C-suite has translated into big money for Heidrick. The Chicago company racked up revenues of $479 million in 2006, a 16% jump over the previous year. All that flux has shareholders enthusiastic as well. Since Kelly took the helm in September, the stock has soared 37%, to 49, compared with a 9% gain for the Standard & Poor's 500-stock index and 12% for Korn Ferry, the other top-tier, publicly traded search firm. (BusinessWeek's parent, The McGraw-Hill Companies (MHP ), employs Heidrick for some of its executive searches.)

Despite Heidrick's highs, some investors still figure there's considerable upside over the long term. For one, baby boomers will be retiring in droves over the next 10 years, with a shrinking pool of 35-to-50-year-olds to replace them. The Association of Executive Search Consultants expects more than 50% of top managers to leave within five years. Since its stiffest competition for high-level searches, Spencer Stuart and Russell Reynolds Associates, are privately held, Heidrick is one of the few ways for investors to play this demographic shift. "They have a great reputation and a lot of trends driving growth," says William F. Fiedler, a portfolio manager at Skyline Asset Management, which owns more than 675,000 shares of Heidrick.

The 54-year-old firm, known for placing big-name CEOs like Louis V. Gerstner Jr. at IBM (IBM ) and current Boeing chief W. James McNerney at 3m (MMM ), also has a brand that translates well overseas, where the search market is growing faster than in the U.S. While revenue growth in North America has slowed to 11% from 17% a couple of years back, international markets are chugging along at nearly 25%. Heidrick is already staking out a position in Europe and Asia. While it's had long-established relationships with multinationals in their home countries, it's helping them expand their recruiting beyond the usual borders.


Yet kelly knows he needs to continue spiffing up those businesses, especially the European operations. Europe generates about a third of Heidrick's sales, but its 9.1% operating margins are much slimmer than those in the Americas (20.3%) and Asia Pacific (26.8%). Kelly is attacking the problem, shuttering unused office space as well as cutting administrative staff and underperforming recruiters. Fiedler figures Heidrick can improve margins in Europe to 15%, "which would be huge."

Of course, the big question for Heidrick in the short term is the economy. When the tech bubble burst, net revenues plummeted from a peak of $594 million in 2000 to $320 million by 2003. With economists worried about a slowdown, Heidrick and others could suffer. "If you look back over history, it shows you don't want to project the good times will keep going," says analyst Kristin Rowland of Morningstar Inc. (MORN )

But Heidrick is better prepared this time. It has diversified, de-emphasizing technology, and although 34% of its revenues now come from the financial sector, they are spread across different segments, such as asset and wealth management, insurance, and private equity. Overall, Kelly anticipates sales of around $570 million this year, an increase of roughly 20% from 2006, and record operating margins of 13%.

Heidrick also has a pristine balance sheet, with some $221 million in cash and practically no debt. Last year, Heidrick used some of its cash hoard to buy Highland Partners for $36.6 million, a deal that should add more depth to its financial services practice. More could be on the horizon, says Kelly: "We're always looking at ways to invest that cash and return value to shareholders."

By Roger O. Crockett

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