First Advantage Buys Firms Amid Sector Growth

First Advantage still has a big appetite. The company, which offers a wide range of business data services, has bought five firms so far this year in the field of employment screening.

The latest acquisitions, part of a broader strategy involving the purchase of more than 40 firms in the past several years, could help the company take advantage of fast growth in the employment background checking industry. But First Advantage faces a challenge when it comes to smoothly swallowing all the firms it has snapped up.

First Advantage aims to keep its annual client “churn” rate at less than 4 percent, says Bart Valdez, head of employer services operations. But at times a higher percentage of customers of acquired firms have left.

“I wish I had the magic bullet for integrations,” Valdez says. “They can be difficult.”

At first glance, St. Petersburg, Florida-based First Advantage seems an odd mishmash of a company. One wing helps managers of multifamily housing units perform background checks, and another conducts insurance fraud investigations. When it comes to employer services, the company’s offerings include background checking, drug testing, employee assistance programs and hiring management software.

First Advantage is majority-owned by the First American Corp., which provides business information including real estate data.

A focus on business data is the glue that holds together First Advantage’s various units and 4,100 employees, Valdez says. And he argues that the range of employer services offered by First Advantage lets it act as a one-stop shop for clients—and pitch more than one service.

“Twenty to 25 percent of all our new contracts are coming through as a cross-sale,” he says.

For the first quarter of 2006, employer services operations raked in revenue of $39.7 million, up from $29.9 million in the first quarter of 2005. First Advantage’s total revenue for the quarter was $194.3 million.

First Advantage is one of the five largest background checking providers, says Barry Nadell, co-chairman of the National Association of Professional Background Screeners industry group. Consolidation in the industry has been going on for several years, says Nadell, whose own firm, InfoLink Screening Services, was bought by risk consulting company Kroll this year. Kroll, another big player in the background checking field, is a unit of professional services firm Marsh & McLennan Cos.

Compliance and liability concerns are key factors behind the growth of the employment background checking industry, Nadell says. While less than 20 percent of businesses conducted significant background checks when hiring 10 years ago, 80 percent to 90 percent of firms now run a substantial background check that includes a criminal record review, according to Kroll.

Mark Marcon, an equity analyst at investment firm Robert W. Baird & Co., forecasts total revenue in First Advantage’s employer services operations to rise 20 percent this year, to $182.4 billion.

“The hiring environment is a key driver to the company’s core pre-
employment screening business,” Marcon wrote in an April report. “Over the past year, hiring conditions have improved substantially … .”

Colin Gillis, equity analyst at investment firm Canaccord Adams, says First Advantage’s purchase of smaller background checking firms is a way to acquire midsize customers. Its expanded operations overseas, meanwhile, reflect a bid to attract Fortune 1,000 clients. Among its acquisitions this year was Tokyo-based employment screening company Brooke Consulting.

A challenge for First Advantage, Gillis says, is establishing the company’s brand as a one-stop shop for employers and successfully cross-selling services. Otherwise, he says, the firm could end up as a “collection of businesses that don’t mesh.”

—Ed Frauenheim