Mergers and Acquisitions

9-201-068 R E V : J U L Y 1 , 2 0 0 4

________________________________________________________________________________________________________________ Professors Simi Kedia and Peter Tufano prepared this case with the help of Ann Leamon, Manager, Center for Case Development, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

S I M I K E D I A

P E T E R T U F A N O

Adecco SA's Acquisition of Olsten Corp

In the summer of 1999, John Bowmer, Adecco’s CEO, faced a tough situation. Adecco SA, one of the world’s leading staffing companies, was in the midst of attempting to acquire the staffing operations of Olsten Corporation. Eighteen months earlier, Bowmer had first made contact with Olsten’s CEO at that time, Frank Liguori, and a member of the board of directors, Josh Weston. But now, the negotiations with Olsten had come to a standstill, and Olsten had received an offer from a competitor. Bowmer did not know what price the other suitor for Olsten had offered nor how Stuart Olsten, the son of Olsten’s founder, was leaning. He decided to talk directly to his friend Weston to remove the deadlock in the negotiations. In preparation for this conversation, Felix Weber, the CFO of Adecco, reviewed his team’s valuation of Olsten. Adecco not only needed to ascertain the right price to bid for Olsten, but also to address the more “emotional” needs of the seller. Though the negotiations looked promising, the entrance of a new bidder had made them complicated.

Bowmer and Weber were well aware of the importance of the Olsten acquisition for Adecco’s strategy. Adecco was a global leader in employment services and had grown rapidly through acquisitions and organic growth since its creation through a merger in 1996. Adecco’s global corporate strategy targeted market leadership as a key goal. Bowmer made this point in clear terms: “An important part of Adecco’s global strategy is to become the number one or two staffing service firm in each of the major markets globally.” The acquisition of Olsten would enable Adecco to increase its share of the large US market from 6% to 10%, making it the number one staffing company in the country.

Given the strategic importance of the Olsten acquisition, Weber pondered over his valuation model. Coming up with a right price was critical, in particular, as Adecco was not alone anymore in its interest in acquiring Olsten. Vedior, a Dutch company and Adecco’s rival in Europe, was also in talks with Olsten. Bowmer reflected on the role of the Olsten family, who held 67% of the voting power in Olsten through its control of supervoting Class B shares.1 Though Edward A. Blechschmidt had taken over as CEO in February 1999, Stuart Olsten was the chairman of the board and would no doubt have an important say in the matter. Bowmer hoped that he could talk directly with Weston to establish what was important to both parties and come to an agreement on the price and address the concerns of major shareholders.

1 Supervoting stock has voting rights greater than common stock, which is usually characterized by one share one vote.

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The Staffing Industry

The staffing industry had first appeared in the mid-twentieth century, but its role evolved over time. Initially, staffing firms provided mostly unskilled work in the industrial sector or short-term replacements for sick or temporarily-absent workers, earning them the nickname “temp firms.” Over time, staffing firms began to place more skilled workers in all sectors of the economy and for much longer assignments than in the past. They also broadened their activities to provide firms with permanent placement, payroll, outplacement, and other managed services. Reflecting these changes, the “staffing industry” shed its old label of “temp firms.” Rather than providing stand-in workers, they now provided firms with just-in-time flexible workforces. With this change, staffing companies sought to become long-term business partners, serving as valuable intermediaries between employees and employers.

The global staffing industry grew at an extraordinary 13% per annum on average between 1987 to 1999. Two general factors were responsible for this growth rate. First, economic expansion of the late 1980s and subsequent contraction encouraged companies to carefully scrutinize operating costs and introduce more flexible cost structures. In the past, employing temporary workers involved lower direct costs, though legislation (particularly in Europe) aimed at establishing the right of temps to earn at least as much as full time employees had reduced this advantage. Yet, by employing temporary workers, companies could still reduce the idle time of permanent workers, shift wages from semi-fixed to variable costs, and adjust their cost structures for just-in-time staffing, especially when faced with seasonality, and economic and product cycles. Client companies also used staffing companies to save on the indirect costs of hiring, finding, assessing, and training workers. (See Exhibit 1.) Second, the staffing industry’s growth also reflected changes in the “professional” segment of the labor market. For many reasons, short-term assignments became more acceptable to professionals in information technology (IT), accountancy, engineering, sales, finance, legal, medical, energy, automotive, and purchasing segments of the labor market. These professionals apparently valued the ability to deepen their specialization, broaden their work experiences, and build more flexible careers. The professional segment of the staffing industry facilitated this trend.

The staffing industry was fragmented with the top five companies in the world accounting for 27% of the market. (See Exhibit 2 for the size of major world markets, and Exhibit 3 for the major global companies and their market shares.) The industry had been consolidating rapidly over the past few years. In 1998, there were a total of 514 acquisitions announced worldwide, sharply higher than the 105 in 1994. This trend towards consolidation had been spurred by increasing globalization of the client companies. Whereas big business was a small fraction of total staffing revenues in the early 1990s, it had risen to approximately 50% by 1999. By consolidating, staffing firms moved from being local service providers to having a national presence and being global players. It allowed staffing firms to provide a full range of consistent services in all countries in which global clients operated, as well as to leverage investment in infrastructure like IT, and to exploit economies of scope.

Substantial economies of scale and scope were possible with consolidation. Large staffing companies brought together employees and employers and became thriving labor exchanges. As the staffing firm increased in size and catered to more employers, employees were attracted to the firm and its large pool of employers. Similarly, with size and a larger pool of employees, more employers were attracted to the firm. Increases in size and market share thus substantially reduced the costs of selling and recruiting for the staffing company and, therefore, increased margins. Adecco’s historical estimates indicated a strong relationship between its profitability and national market share, as well as a relationship between growth and returns. (See Exhibits 4 and 5.)

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In addition, the large sums that staffing agencies were spending on internal information technology systems made size an advantage. Adecco’s internally developed Xpert system was a state- of-the-art evaluation and testing tool, and its MAX Adia Office Automation & Design (TM) system integrated the results of Adecco’s skills testing with personal attributes and work history to automatically match available candidates with customer requirements. MAX also tracked the performance of temporary personnel and provided quality reports to their customers.

The US, by far the largest staffing market, had a compound annual growth rate of 17% from 1993 to 1998. The specialized services area, including IT, accounting, and legal staffing, not only had the highest growth rates (see Exhibit 6), but also the highest gross margins. This trend of high margins and high growth in the specialized services was expected to continue in the future, especially in IT due to system conversion needs for the year 2000. However, growth rates in general staffing were projected to decline in the short run. Specialized staffing was characterized by higher margins, with net income as a percentage of sales being 4.9% in 1997 for the US in comparison to 2.2% for generalized staffing.

Adecco SA

Formed in 1996 from the merger of the Swiss firm Adia SA with the French firm Ecco, Swiss-based Adecco SA was the world’s largest staffing company by 1999. Adecco had grown rapidly, increasing annual sales from 6.4 billion Swiss Francs (CHF) in 1996 to CHF 15.3 billion in 1998 and operating over 3,000 offices in 52 countries. Net income before amortization of goodwill2 increased from CHF 240 million in 1996 to CHF 406 million in 1998, and Adecco shareholders enjoyed nearly a quadrupling of their share values in the time since the firm’s inception. Adecco outperformed its peers over this period and was the first firm in the industry to be certified by the International Organization for Standardization (ISO). (See Exhibit 7 for Adecco financials and Exhibit 8 for its stock performance.) It was the market leader in France, Canada, Switzerland, Australia, and Spain, and was second in the US and UK. Only in the Benelux countries and Japan was it fourth or fifth in the market.

Adecco’s success was the result of a consistent strategy aimed at making Adecco the “employer of choice” and the “supplier of choice.” (See Exhibit 9.) The first goal of this three-pronged strategy was rapid growth to be achieved both organically as well as through acquisitions. This sales growth had resulted in higher total return to shareholders. (See Exhibit 5.)

Along with increasing growth rates, gaining national market share was an important goal for Adecco. John Bowmer said, “We will be number one or two in market share in the 11 biggest national markets, and we will work to attain a 20% share of each market.” This strategy, he said, was “not ego or vanity but…good business sense,” citing the fact that historically EBIT margins increased with market share. (See Exhibit 4.) Employers preferred dealing with fewer staffing firms who were able to provide services in different regional and national markets, because it was less expensive and guaranteed “consistent service.” One-third of Adecco’s contracts were with large national or multinational firms with multiple sites. While these arrangements carried lower gross margins, overhead costs were also correspondingly lower. While the average cost of services in the US was 15- 20% for the placement in small companies, they amounted to only 5 to 10% for large contract business.

2 Goodwill arose when a firm acquired another company for a price in excess of book value. This difference was amortized and “expensed” on a firm’s income statement, although it was a non-cash charge.

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The third driver of Adecco’s strategy was an emphasis on its high-value business segments. Adecco was a diversified staffing company with 88% of its worldwide sales coming from general staffing and the remaining 12% from IT and other specialized staffing. (See Exhibit 10.) In specialized staffing, characterized by higher margins, Adecco operated a number of well established brands like aoc (accounting), Jonathan Wren (finance and banking), Ajilon and Computer People (both IT), TAD and Roevin (engineering and technical), and Econova/Lee Hecht Harrison (outplacement).

Achieving the number one market position in the large US market was high on the goals of Adecco’s board. In December 1998, the board had met to discuss potential acquisitions that would enable Adecco to increase market share in the US. Olsten was on top of the list, although this position was not undisputed. The Chairman of Adecco suggested that it might be preferable to invest heavily in internet human resource companies that provided staffing services through the internet, rather than through physical offices. He also wondered whether it might be prudent to delay the acquisition. He believed that Olsten’s value was more likely to fall than rise over time, given the problems it faced, and he was concerned that it might lose market share in the wake of the merger.

Olsten Corporation

William Olsten founded Olsten Corporation, a $5 billion home health care and staffing firm, in 1950. After stints as a produce buyer, soap seller, and restauranteur, he went into the staffing business, placing his sister and his wife as the firm’s first temps. The firm grew rapidly and went public in 1967. By 1998, the company was the third largest staffing company in the world with global staffing revenues of $3.1 billion, and US revenues of $2.4 billion. It was operating in 14 countries with 1500 offices and had a global market share of 3.9%. It also had sizeable presence in the fast-growing IT area, which accounted for 12-14% of total staffing revenues.

The Olsten family continued to play an important role in the firm through its ownership of Class B stock, which was entitled to ten votes per share versus one vote for each share of common stock. In 1999, there were about 68 million common shares and 13 million Class B shares outstanding. The Olsten family owned 16% of the firm, but controlled 66% of the votes cast in corporate matters.

In the 1970s, Olsten extended its temporary staffing expertise into home health care. Olsten Health Services in the United States and Canada provided home care management and coordination for the managed care community along with home infusion and other therapies. In 1993, Olsten acquired Lifetime Corporation, the then largest provider of home health. In 1998, Olsten repurchased home health offices it had sold to Columbia/HCA for approximately $30 million. By that year, Health Services accounted for about 27% of Olsten’s total revenues.3

Olsten also aggressively expanded its staffing business outside the US. After the death of William Olsten in 1991, his son, Stuart Olsten, directed this initiative. A series of acquisitions from 1994 to 1997 substantially increased Olsten’s presence in Europe and Latin America, and in total Olsten invested approximately $150 million in these acquisitions.4

3 The percentage of sales from health care increased slightly if total company sales did not include franchise and subcontractor sales, as was Adecco’s practice.

4 Among others, Olsten acquired or purchased majority stakes in Office Angels in the UK, in Norsk Personal AS (the second- largest staffing company in the Nordic area); Alegro Vikarservice ApS (Denmark); OFFiS Unternehmen fur Zeitarbeit GmbH &

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Although Olsten was the largest provider of home health services in the US, this business had become increasingly difficult. In 1997, the government had reduced reimbursements through its Medicare interim payment system, and managed-care organizations were also cutting payments for home nursing. Several health-care subsidiaries faced both civil and criminal investigations for Medicare fraud, and over a thousand health companies closed for financial reasons. Olsten launched a comprehensive restructuring and recovery plan for its health care business in 1997, the efficiencies of which were expected to materialize in 1998 and 1999. In October 1998, Olsten paid $4.5 million to settle a federal Medicare fraud investigation involving Quantum Health Resources,5 and in March 1999, it pled guilty to other federal and state investigations relating to its home health division, incurring special charges of $61 million. Further on March 30, 1999, the company announced plans to take a special charge during the first quarter of 1999, aggregating $46 million as part of the ongoing restructuring of business units. Of this, approximately $22 million was for compensation and severance costs, $16 million was for asset write-offs, and $8 million was for integration costs.

The company faced other challenges as well. Completing the purchase of its European subsidiaries was proving more expensive than anticipated. In some of these subsidiaries, Olsten had acquired a 51% stake, planning to fund its purchase of the balance out of cash flow and additional equity raised once the anticipated appreciation in share price materialized. Under these agreements, Olsten might need $100-150 million to complete the Sogica earnout6, $50-100 million for the Norsk earnout, and $15-20 million to complete earnouts of minority interest in Latin America. The Sogica payment was contractually due in March 2000, and the Norsk buyout depended on the intentions of the Norsk minority shareholders. (They had the right to sell their stake at any time based on a third party value evaluation.) Additional staffing services in France and health service units in the US were purchased in the first six months of 1999 for $15 million in cash. Minority interest was estimated to be around 6% of Olsten’s enterprise value.

Olsten’s debt rose over this period, increasing from $461 million in December 1997 to $606 million in January 1999 and to $746 million by July 1999. The long-term debt of $746 million included a revolving credit line agreement with a consortium of 11 banks. As of July 1999, Olsten had drawn down $344 million of the $400 million credit line. This agreement was scheduled to expire in 2001, thus its classification as long-term debt. The credit agreement was subject to a number of affirmative covenants (e.g., Olsten had to provide audited financial statements), negative covenants (e.g., Olsten was restricted in selling assets, and issuing debt), and financial covenants (e.g., Olsten had to maintain certain financial ratios). In May 1999, the company’s revolving credit agreement was amended to revise provisions related to the maintenance of various financial ratios and covenants. In 1996, Olsten was required to maintain an EBIT/Interest Expense ratio of at least 5, and a Debt/EBITDA ratio of at most 2.5. The banks voluntarily amended these covenants in April 1999, requiring Olsten to maintain an EBIT/Interest ratio of at least 3 and a Debt/EBITDA ratio of at most 3.75. Any failure on the part of Olsten to observe these covenants or adhere to the credit agreement would constitute an event of default. Banks were unwilling to increase Olsten’s credit lines, and it was unlikely that the obligations in 2000 could be met through internal cash flow generation.

As a consequence, Olsten performance lagged behind other firms in the staffing industry and its stock price declined sharply. (See Exhibit 11 for Olsten financial statements.) Olsten’s board and

Co. KG (Germany's third-largest staffing firm); Kontorsjouren AB (Sweden's third-largest staffing firm); Dataset OY (Finland); and Sogica SA (France and Spain); and various majority investments in South America.

5 An infusion therapies company Olsten had acquired in 1996.

6 In an “earnout,” an acquirer agrees to pay the seller a contingent payment well after the deal is consummated. The payment is based on the subsequent performance, typically accounting performance, of the acquired entity.

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management came to appreciate the position of the firm, and in particular its need to finance the repurchase of minority interests and earnouts in 2000. As a consequence, they were actively looking for alliances or mergers by the end of 1998.

Adecco’s Initial Approach to Olsten

The Adecco management team selected Olsten from among a number of potential acquisitions because of its fit with Adecco. The staffing business of Olsten complemented Adecco’s business in the US. Whereas Adecco operated mostly in the western part of the US, Olsten was dominant in the East. Outside the US, Olsten had significant presence in Scandinavia, Latin America and Germany, where Adecco’s market share was small. Olsten’s sizeable presence in the specialty IT business would allow Adecco to increase market share in this segment. Finally, Adecco management felt that the cultures of the two companies were compatible, making Olsten a desirable acquisition.

In early talks held in December 1998, Adecco expressed its interest in acquiring Olsten. Bowmer and Weber were in complete agreement that they did not want to acquire the troubled home health care business and the preliminary offer was for Olsten’s staffing business. Though initially, Stuart Olsten, the Olsten board, and their financial advisors did not want to separate the businesses, they had become reconciled to this as the negotiations progressed. Olsten had also indicated that a successful offer (for the company including healthcare) would be above $20 a share even though the share price was trading much below that, recently at $7.38. This target price was partly based on the share price of $32, above which the stock had briefly traded in 1996. (See Exhibit 12 for Olsten stock price.)

As talks proceeded, Olsten and Adecco agreed that the home health care unit would be spun off as a separate company to the current shareholders of Olsten as part of the acquisition. On February 10, 1999, Adecco made an offer for Olsten’s staffing business. In March, Olsten employed Solomon Smith Barney Inc. and later, Warburg Dillon Read LLC, to review strategic options and Adecco’s offer. Stuart Olsten indicated that a successful offer would have to value the staffing business at a minimum of $16 a share, higher than the $11 being offered by Adecco. By April, Olsten and Adecco had executed a confidentiality agreement and Adecco commenced due diligence.

The negotiations between Adecco and Olsten took a turn for the worse with the emergence on the scene of Vedior, a large Dutch staffing company, which also showed an interest in acquiring the staffing business of Olsten. In late June, Warburg Dillon Read, on behalf of Olsten, was in talks with both Goldman Sachs, on behalf of Adecco, and with the investment bankers of Vedior. By early July, Adecco and Vedior submitted competing non-binding proposals for the acquisition of Olsten’s staffing business. On July 9 and July 14, a special committee of the board of directors of Olsten, consisting of Blechschmidt, Stuart Olsten, and four other directors, met to review both offers. The board of Olsten was scheduled to meet on July 22, 1999 to consider the sale of Olsten. Bowmer and Weber knew they had to convince Josh Weston and Stuart Olsten, in particular. Though Weber was not interested in getting involved in a bidding war with Vedior over Olsten, he decided to reexamine his valuation model given the importance of Olsten for Adecco’s US strategy.

Over the last few years, Adecco had made many large acquisitions of personnel services businesses, including TAD, Delphi Group plc, and Career Staff Ltd. The acquisition activity had allowed them to develop their “Pentagon Approach” to valuation that had been hailed for its success by Wall Street. The Pentagon Approach was a simple five-step method for valuing target businesses. It involved 1) valuing the target business as-is; 2) valuing the business with all synergies less any

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costs of integration; 3) adding any potential gains from Adecco’s cross-border financing strategy; 4) adding any potential gains from reduced tax liability accruing from Adecco’s ownership of the business; and 5) finally determining the suitable price to be paid.

The estimated synergies from combining the two businesses, as well as the resulting integration costs, were methodically determined for each country and for the various specialties. Olsten’s staffing business could be merged with a US subsidiary of Adecco SA. Adecco estimated that integration of Olsten’s North American operations would lead to significant synergies, 50% of which would be realized in 2000 and the full potential to be realized thereafter. However, based on their experience, there were also likely to be significant one-time costs of integrating the two businesses in the US. In valuing Olsten’s non-US operations, Adecco assumed no synergies nor integration costs. Adecco’s pro forma forecast of Olsten’s staffing business, incorporating all synergies and integration costs in line with the second step of the Pentagon Approach, are presented in Exhibit 13. The cash flows were expected to grow at 5% per annum after the ten-year period modeled.

Adecco’s policy was to finance internal growth through cash generated from operations while financing external growth through a mix of debt and equity. In the case of Olsten, Adecco expected to finance 30-40% of the total price through equity and the rest with debt. Weber anticipated raising additional equity, bringing the capital structure to 80% equity (at market value) and 20% debt, which is what was applied for WACC. Adecco, rated BBB+, faced an average long-term borrowing rate in US dollars of approximately 7%. Bowmer and Weber felt comfortable with Adecco’s ability to raise debt financing for the Olsten acquisition at this rate. 7

Based on tax treaties between the US and Switzerland, the parent company, Adecco SA, was entitled to receive royalty payments of about 1-2% of gross revenues for marketing and corporate services provided. These royalties paid by the US subsidiary would be considered as expenses in the estimation of the firm’s US tax liability. These royalties would be treated as income for the parent Adecco and taxed accordingly, at the Swiss corporate tax rate of 9%. The valuation analysis in Exhibit 13 did not incorporate this factor into the projected cash flows.

It had been the policy of Adecco not to pay the full estimated value of the acquiring business. This was driven by the conviction that a part of the value being created was from synergies unique to Adecco and from Adecco’s ability to leverage its global position to create additional value from financing and taxation.

Bowmer thought about the stalemate in the negotiations. He not only had to decide what Adecco should offer to pay for Olsten’s staffing business, but he also had to convince Josh Weston and Stuart Olsten that it was in the best interest of Olsten shareholders to accept Adecco’s offer. He hoped that he would be able to learn about the issues and choices before the Olsten board and how best to address them.

7 It was tentatively agreed that Adecco would assume$750 million of Olsten debt. Adecco would then decide whether to retain, refinance, or repay the debt.

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Exhibit 1 Survey Results on Firm’s Use of Employment Companies

Source: Adecco. Survey conducted by McKinsey / Deloitte Touche.

Exhibit 2 Global Staffing Market Share, 1998

Industry size (Billions $) Adecco Share (%) Olsten Share (%)

US 72 5.5 4.2

UK 17 4.5 0.9 France 12 29.4 3 Japan 12 8 0

Netherlands 7 6 0 Switzerland 2 3.0 0 Other Europeana 7 39.8 20.6

Sources: Baird Business Services, Adecco estimates.

aIncludes Belgium, Germany, Spain, and Scandinavia.

Exhibit 3 Global Market Shares Based on 1998 Revenues

Global Market Share (%) No. of Countries No. of Offices

Adecco 8.2 52 3000 Manpower 8.1 50 3000 Olsten 3.9 14 1500

Randstand 3.4 11 1616 Kelly 3.1 19 1800 Vedior 3.0 8 1301

Interim Service 2.5 12 1350

Source: ABN Amro Research, Adecco estimates.

Myth 1: Clients Use Employment Companies to Smooth Economic Cycles

Provide employees for regular jobs

Provide specialized skills

Help absorb fluctuations

81

15 4

100%

27%

23%

21%

10%

Replacements

Seasonal fluctuations

Unexpected peaks

Economic cycle

11%

1%

3%

To recruit them

Because they are cheaper

Other reasons

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Exhibit 4 Relationship Between Gross EBIT Margin and Market Share for Adecco

Market Share %, 1996

E B

IT in

% G

ro ss

M ar

gi n,

1 99

6

8

1 3

1 8

2 3

2 8

3 3

3 8

4 3

0 4 8 1 2 1 6 2 0 2 4 2 8 3 2

Source: Adecco. (Points on the chart represent countries where Adecco operated.)

Exhibit 5 Shareholder Return and Sales Growth for Adecco (1997-1998)

Sales growth (%)

To ta

l r et

ur n

to sh

ar eh

ol de

rs (%

)

0

5

1 0

1 5

2 0

2 5

3 0

3 5

0 5 1 0 1 5 2 0 2 5 3 0 3 5 4 0

Source: Adecco. (Points on the chart represent countries where Adecco operated.)

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Exhibit 6 Growth Rates for US Staffing Industry and Selected Segments, 1993-1998

Annual Growth Rates (Year over Year percentages)

Industry Segment 1993 1994 1995 1996 1997 1998 Total Temporary Help 17 24 16 14 16 15 Medical 3 6 9 5 10 11 Professional/Special 33 33 25 25 26 25 Technical/IT 12 25 30 27 27 25 Office/Clerical 13 22 12 9 10 9 Industrial 32 29 11 7 10 10

Source: Stephens Inc.

Exhibit 7A Adecco Income Statement (CHF millions)a

28-Dec-97 3-Jan-99b Net service revenues 11,432 15,308 Direct cost of services 9,304 12,664 Gross profits 2,128 2,644 Selling, general and administrative expenses 1,647 1,997 Amortization of goodwillc 507 601 Interest Income 23 23 Interest Expense 52 91 Other income (expense) 10 3 Income (loss) from operations before taxes and minority interests (45) (19) Provision for income taxes 160 174 Income applicable to minority interest 1 2 Net income (loss) (206) (195) Net Income before amortization of goodwill 301 406

Source: Adecco Annual Report.

a On December 28, 1997, 1 Swiss Franc (CHF) = $0.69 (USD). On January 3, 1999, the exchange rate was 1 CHF = 0.7323 USD.

b Adecco's fiscal year ends on the Sunday nearest to December 31. FY 1998 contained 53 weeks and ended on January 3, 1999. FY 1997 contained 52 weeks and ended on December 28, 1997.

c Goodwill was not deductible for tax purposes.

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Exhibit 7B Adecco Balance Sheet (CHF millions, except number of shares)

28-Dec-97 3-Jan-99 ASSETS Current Assets Cash and cash equivalents 439 540 Trade accounts receivables 2,357 2,611 Other current assets 272 342 Total current assets 3,068 3,493 Plant, property, equipment and leasehold improvement, net 257 248 Goodwill, net 2,302 1,730 Other assets 104 136 Total Assets 5,731 5,607 LIABILITIES Current Liabilities Short term debt and current maturities of long term debt 843 303 Accounts payable and accrued expenses 2,003 2,399 Total current liabilities 2,846 2,702 Long term debt 663 688 Other liabilities 194 144 Minority interests 8 5 SHAREHOLDERS’ EQUITY Common stock, CHF 10 and CHF 2 par value 165 171 Additional paid in capital 1,611 1,904 Retained earnings (deficit) 306 20 Accumulated other comprehensive income (8) 3 Treasury stock (54) (30) Total Liabilities and Shareholder's Equity 5,731 5,607 Shares Common stock authorized 19,783,019 17,764,182 Common stock issued 17,830,928 17,084,347 Common stock outstanding 17,812,031 17,024,909

Source: Adecco Annual Report.

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Exhibit 7C Adecco Statement of Cash Flows (CHF millions)

28-Dec-97 3-Jan-99 OPERATING ACTIVITIES: Net Loss (206) (195) Depreciation and amortization 571 683 Net (increase) decrease in working capital (188) 192 Other adjustments, net 11 (9) Net cash provided (used) by operations 188 671 INVESTING ACTIVITIES: (Increase) decrease in plant, property and equipment (76) (122) (Acquisitions) disposal of subsidiaries and business (632) NA Other cash from investments, net (78) (72) Net cash provided (used) by investments (786) (194) FINANCING ACTIVITIES: Net increase (decrease) in short-term debt 379 (517) Net increase (decrease) in long-term debt 359 2 Dividends paid to shareholders (82) (91) Issuance of common stock, net (39) 323 Other financing activities (19) (18) Net cash provided (used) by financing activities 598 (301) Net effect of exchange rates on cash (175) (75) Net change in cash or equivalents (175) 101 Cash or equivalent at the beginning of the year 614 439 Cash or equivalent at the end of the year 439 540

Source: Adecco Annual Report.

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Adecco SA’s Acquisition of Olsten Corp 201-068

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Exhibit 8 Growth of One-Dollar Invested in Major Staffing Firms, 1996-1999

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1/2 /96

3/2 /96

5/2 /96

7/2 /96

9/2 /96

11 /2/

96 1/2

/97 3/2

/97 5/2

/97 7/2

/97 9/2

/97

11 /2/

97 1/2

/98 3/2

/98 5/2

/98 7/2

/98 9/2

/98

11 /2/

98 1/2

/99 3/2

/99 5/2

/99 7/2

/99

G ro

w th

o f $

1

Olsten

Manpower

Adecco

Kelly

S&P 500

Source: Datastream.

Exhibit 9 Adecco’s Strategic Goals

Our Strategy Has Been Consistent

Growth beyondGrowth beyond marketmarket

• Organic growth 50% above market • Acquisitions and organic growth

Market leadership

Optimized business mix

• Specialty business focus • Evolution from staffing to HR services

• No 1 or No 2 in all major markets with 20% market share

• Quality/Cost enhancement through Technology

Employer of Choice Supplier of Choice

Source: Adecco.

For the exclusive use of B. Patel, 2017.

This document is authorized for use only by Biren Patel in M&A-Fall 2017 taught by Hieu Phan, HE OTHER from September 2017 to December 2017.

201-068 Adecco SA’s Acquisition of Olsten Corp

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Exhibit 10 1998 Pro Forma Segment Shares for Adecco and Targeted Olsten Staffing Business

% of Adecco Sales % of Olsten Sales

General staffing 88.3 82.6

IT 5.2 13.4 Other Specialties 6.5 3.9

Source: Adecco estimates.

Exhibit 11A Olsten Consolidated Income Statement ($ millions)

1996 1997 1998 July 4, 1999b

Revenue 3,378 4,113 4,603 2,447 Cost of services sold 2,422 3,017 3,501 1,848

Gross Profit 956 1,096 1,102 598

Selling general and administrative expenses 768 915 1,050 639 Net interest expense 12 21 30 20

Merger and other non-recurring charges 80 0 0 0

Income before taxes and minority interest 95 160 21 (60)

Taxes 39 63 8 (16) Income before minority interest 56 98 13 (44) Minority interesta 2 5 9 4

Net income 55 93 4 (49)

Sources: Olsten Annual Report, unaudited 10Q dated July 4, 1999.

a Olsten did not own 100% of all its subsidiaries. Minority interest was the income attributable to the other (minority) shareholders in these businesses.

b The numbers are for the six months ending July 4, 1999.

For the exclusive use of B. Patel, 2017.

This document is authorized for use only by Biren Patel in M&A-Fall 2017 taught by Hieu Phan, HE OTHER from September 2017 to December 2017.

Adecco SA’s Acquisition of Olsten Corp 201-068

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Exhibit 11B Olsten Consolidated Balance Sheet ($ millions, except number of shares)

1997 1998 July 4, 1999 ASSETS Current assets Cash 85 54 15 Receivables, less allowance for doubtful accounts 847 1,006 1,147 Prepaid expenses and other current assets 91 134 141 Total current assets 1,023 1,194 1,303 Fixed assets, net 186 233 238

Net intangibles, principally goodwill 534 614 596 Other assets 7 18 10 Total assets 1,750 2,059 2,146 LIABILITIES Current liabilities Accrued expenses 152 196 198 Payroll and related taxes 86 144 155 Accounts payable 56 143 135 Insurance costs 41 36 42 Total current liabilities 335 519 529 Long term debt 461 606 746 Other liabilities 112 111 105 SHAREHOLDERS’ EQUITY Class A Common Stock $0.10 par values 7 7 7 Class B Common Stock $0.10 par value 1 1 1 Additional paid in capital 447 447 448 Retained earning 391 377 322 Accumulated other comprehensive income (4) (10) (11) Total Shareholders’ Equity 842 823 767 Total Liabilities plus Shareholder Equity 1,750 2,059 2,146 Class A Shares Outstanding (110,000,000 authorized) 68,151,708 68,253,080 68,276,817 Class B Shares Outstanding (50,000,000 authorized) 13,157,617 13,071,560 13,066,003

Sources: Olsten Annual Report, unaudited 10Q dated July 4, 1999.

For the exclusive use of B. Patel, 2017.

This document is authorized for use only by Biren Patel in M&A-Fall 2017 taught by Hieu Phan, HE OTHER from September 2017 to December 2017.

201-068 Adecco SA’s Acquisition of Olsten Corp

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Exhibit 11C Olsten’s Consolidated Statement of Cash Flows ($ millions)

1996 1997 1998 July 4, 1999a OPERATING ACTIVITIES: Net income 55 93 4 (49) Depreciation and amortization 44 56 69 40 (Increase) decrease in net operating assets (113) (63) (15) (126) Net cash provided (used) by operations (14) 85 59 (135) INVESTING ACTIVITIES: (Increase) decrease in plant, property and equipment (41) (71) (90) (40) (Acquisitions) disposal of subsidiaries and businesses (136) (150) (107) (15) (Increase) decrease in other investments 0 9 0 0 Net cash provided (used) by investments (177) (211) (197) (54) FINANCING ACTIVITIES: Net increase (decrease) in debt 188 128 124 160 Dividends paid to shareholders (20) (23) (18) (7) Issuance of common stock, net 21 2 0 0 Net Cash Provided (Used)by Financing 189 108 106 154 Effect of Exchange Rate on Cash 0 (3) 0 (3) Net Change in Cash or Equivalents (2) (21) (31) (39) Cash Payments for Interest Expense 15 24 29 21

Sources: Olsten Annual Report, unaudited 10Q dated July 4, 1999.

aThe numbers are for the six months ending July 4, 1999.

Exhibit 12 Monthly Olsten Share Price Performance, December 1975 - July 1999

0

5

10

15

20

25

30

35

De c-7 5

De c-7 7

De c-7 9

De c-8 1

De c-8 3

De c-8 5

De c-8 7

De c-8 9

De c-9 1

De c-9 3

De c-9 5

De c-9 7

Sp lit

a dj

us te

d st

oc k

pr ic

e

$8.75

Source: Datastream.

For the exclusive use of B. Patel, 2017.

This document is authorized for use only by Biren Patel in M&A-Fall 2017 taught by Hieu Phan, HE OTHER from September 2017 to December 2017.

201-068 -17-

Exhibit 13 Selected Pro Forma Financial Statement Items for Olsten’s Staffing Business, 1998-2009 ($ millions)

1998A 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Revenues 3,097 3,506 3,607 3,979 4,393 4,779 5,196 5,653 6,156 6,709 7,317 7,981

Cost of goods sold 2,417 2,766 2,825 3,096 3,409 3,694 4,004 4,354 4,738 5,159 5,623 6,133

SG&A 517 611 593 616 671 737 803 875 954 1,042 1,138 1,241

Depreciation expense 25 37 40 42 45 49 54 58 63 68 74 83

Operating income 138 91 149 224 267 299 335 367 401 440 482 523

Income taxesa 45 30 49 74 88 98 110 122 132 145 159 173

EBIATb 93 61 100 150 179 201 225 246 269 295 323 351

SELECTED ASSETS

Operating cashc 53 35 36 40 44 48 52 57 62 67 73 80

Accounts receivable 553 554 590 651 718 781 850 924 1,007 1,097 1,196 1,305

Other current assets 30 27 30 35 41 48 52 57 62 67 74 80

Other operating assetsd 16 29 42 58 77 97 106 115 125 137 149 163

Gross PPE 198 249 305 364 426 493 568 649 737 833 938 1,053

Net property plant and equipment 173 188 203 220 238 255 276 299 325 353 384 415

SELECTED LIABILITIES

Total current liabilities 359 331 341 376 415 452 491 534 582 634 691 754

Other non-interest liabilitiesd 113 107 110 121 134 95 103 112 122 133 145 158

Source: Adecco and casewriter’s estimates.

a Income taxes have been calculated as 33% of operating income assuming no interest expense.

b EBIAT was earning before interest and after taxes. It was calculated as operating earnings less taxes. These earnings were consolidated earnings for Olsten’s staffing business and included minority interest.

c Operating cash was the cash that was required to operate the business.

d The category “non-interest liabilities” is not included in “total current liabilities.” Similarly, the category “other operating assets” is not included in “other current assets.”

For the exclusive use of B. Patel, 2017.

This document is authorized for use only by Biren Patel in M&A-Fall 2017 taught by Hieu Phan, HE OTHER from September 2017 to December 2017.

201-068 Adecco SA's Acquisition of Olsten Corp

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Exhibit 14 Securities Market Data for Selected US Staffing Companies ($ millions)

Year End Book Value of Debt

Market Value of Equity

Equity Betaa

Kellyb 1996 42 1,028 1997 55 1,145 1998 48 1,137 0.58 Manpowerb 1996 128 2,668 1997 261 2,832 1998 258 1,988 0.88 Olsten 1996 330 1,201 1997 461 1,220 1998 606 599 0.98

Sources: Calculated by casewriter from data from Datastream and the Center for Research in Security Prices.

a Equity betas were calculated over the period 1996 to 1998.

b Kelly and Manpower were large US firms which operated exclusively in the staffing business.

Exhibit 15 Ten-Year Interest Rates as of July 14, 1999

Interest Rate US Treasury coupon bonds 5.76% AA rated bonds 6.56% BBB rated bonds 7.14%

Source: Bloomberg.

For the exclusive use of B. Patel, 2017.

This document is authorized for use only by Biren Patel in M&A-Fall 2017 taught by Hieu Phan, HE OTHER from September 2017 to December 2017.