Two of the biggest names in background screenings are coming together following a period of slowing demand for their services. Shares of First Advantage (FA 6.54%) are down 7% and shares of Sterling Check (STER +0.00%) are up 25% after the two companies announced plans for an industry-reshaping merger.
A tough market for all involved
First Advantage and Sterling Check both provide third-party screening and verification services for employers and other users. The uncertain economy and a slowdown in hiring has weighed on both businesses, leading to fourth-quarter revenue declines.
First Advantage announced today it earned $0.29 per share in the quarter on revenue of $202.6 million, a 4.7% year-over-year revenue decline and just short of Wall Street's $0.30 per share on revenue of $211 million. Sterling, meanwhile, earned $0.21 per share on revenue of $169.4 million. Wall Street had expected $0.25 per share in earnings on sales of $173 million, and the company had generated $169.9 million in sales in the same quarter a year ago.
"The challenges created by the macro environment in 2023 lasted longer than we had anticipated, leading to base declines in excess of our initial expectations," Sterling Check CEO Josh Peirez said in an earnings statement.
The two companies hope to fix what ails them by combining. Simultaneous to the earnings announcement, First Advantage announced plans to acquire Sterling Check in a $2.2 billion cash and stock deal. Terms of the deal value Sterling Check at $16.73 apiece, a premium of about 35% to the stock's closing price on Wednesday.
The deal is expected to cut about $50 million in combined annual costs and create a screening firm with $1.5 billion in total sales and a wide range of clients from various industries. First Advantage CEO Scott Staples, who will be chief executive officer of the combination, also believes the combination will have the resources to invest in new technologies.
"This combination unlocks efficiencies and opportunities to fuel incremental growth and invest in new technology solutions, including AI-driven automation, while further diversifying our business for greater resilience," Staples said.
NASDAQ: FA
Key Data Points
Should you buy these two screening stocks ahead of their planned merger?
There have already been a lot of deals in the screening market, with Sterling alone buying two companies in 2023. With the economy uncertain and new ways of doing background checks coming online thanks to improved technologies, further consolidation makes sense.
That said, this has been a difficult market for major deals, with antitrust regulators taking a close look at a wide range of mergers. First Advantage and Sterling should expect regulatory pushback here, and if nothing else management teams are likely to be distracted at a difficult time for the industry.
There is solid potential here, but also a lot of unknowns. Investors would be wise to stay on the sidelines for now and see how things develop on both the demand and antitrust fronts before jumping in.
