In Japan’s recruiting world, apart from the 800lb gorilla called Recruit, there really isn’t any company that has bridged the various disciplines of the industry. Instead, success for those companies which have gone public has come from specializing in a particular skill area. There are the temp staffing agents, the online job boards, the outplacement agencies, and as of this week, the real McCoy
— executive and personnel placement.

Actually, It’s interesting to notice that while the leaders in the peripheral industries have all already had IPOs, such as TempStaff, DrakeBeamMorin (now private again), and En-Japan, no one in the core field of personnel placement has. This anomaly will end on September 22nd, with the IPO of JAC Japan, probably Japan’s largest traditional recruiting company.

JAC Japan was established in 1988 as a subsidiary of a UK-based firm, interestingly owned in London by a Japanese expatriate named Tadayoshi Tazaki. It is on track to earn itself a market capitalization after listing of about JPY14.6bn (US$127m), based on a notional PER of about 35 times earnings. JAC’s sales for last year were JPY5.8bn
(US$50m) with profits of JPY594m (US$5.16m). The forecast for this year is for sales of about 50% more, with a small profit increase of about 5%.

Compared to last week’s Mixi IPO and other recruiters in other sectors, though, JAC’s JPY14.6bn valuation and PER of
35 is rather modest. Even online recruiter En-Japan enjoys a market cap of JPY130bn (US$1.13bn) on sales of JPY11.4bn US$99m).

The reason of course, is low profitability. Basically, En-Japan earns about 3 times as much profit on revenues than JAC does, mainly because although it has 800 people compared to JAC’s 400, most of these are sales people and have little to do with the actual work process itself. JAC, on the other hand, has a business process which is focused on manually matching candidates with jobs, by using consultants. This business model is not only labor intensive, it also penalizes the company for growth because consultant commissions are predicated on revenues and climb accordingly.

This of course is the big conundrum for operators of physical recruitment agencies in Japan. They are initially attracted to the industry because of its low cost to entry and high per-transaction rewards. But as revenues climb, and they have to find or train more and more consultants, they come to realize that their’s is a traditional business
— which of course is a fundamentally unattractive proposition for shareholders looking for more leverage and less costs to production.

Nihon Brain Center, the original owner of En-Japan saw this problem very early on and in 1995 formed the now famous online recruiting subsidiary. They have reaped the rewards for moving to a more efficient model, and have accepted that the parent will remain in the shadows. Thus our advice to the management of JAC Japan is that rather than using the bulk of those IPO proceeds for “capital spending and office facilities” we think you should go out and buy one of the many online recruiting businesses that are the future of the industry.

That said, though, there is also another important influencer in JAC’s business. Going forward, the condition of the global economy and thus the Japanese one has a huge impact on results. Recruiting as an industry only does well in a period of economic expansion, which we have had plenty of in the last 3 years, but it is now starting to become saturated with hopeful newcomers, as well as suffering from a scarcity of candidates. This is being reflected in the recent results of all players, where revenues may still be going up, but profit growth is slowing.

Further proof of the vulnerability of traditional recruiting can be found by looking at JAC’s profit results in the 2 years prior to the current expansion (FY2001 and FY2002). There you will see the dramatic impact that 9/11 and the fall-off of activity by international companies had on the company here in Japan.

Our take is that if the US economy does shrink and we do have a medium-to-hard landing in 2007, then based on past experience the foreign firms will be among the first to pull back on expansion plans — causing the market for traditional recruiters such as JAC to become quite severe.

In the meantime, though, we congratulate them for being first across the IPO finish line.