Child Care Providers Are Poised for Growth:Together the Merger Partners Can Offer More Services for Working Families

Two pioneers of work-site child care, Bright Horizons Inc. and CorporateFamily Solutions Inc., have agreed to combine in a transaction of more than $330 million to form a new company with more than 250 employer-sponsored care centers across the country. The combined company, to be called Bright Horizons Family Solutions, would offer the most comprehensive array of work-life services, including work-site schools and consulting services on how to make businesses more family-friendly. After years of competing head-to-head for the same clients, the companies now come together with a shared vision, creating a new company that would be the leading provider or work-life services supporting companies and families. Changes in Work-Life Policies Increase Demand for Services As attention to education reform in the United States increases, more businesses are adopting education as a strong focus for themselves and their communities. Companies like Bright Horizons and CorporateFamily Solutions are witnessing change in the work-life arena, and are poised to serve the needs of working families. The merger would give the combined company a good platform for growth so that it can meet the demand for its services. Both companies, which provide educationally oriented child care services and operate more than 50 certified kindergartens, are enjoying rapid growth in their businesses, due to increased interest in work-site child care. Marguerite Sallee, chief executive of CorporateFamily Solutions, Nashville, says, “A decade of providing quality care has provided a compelling rationale for companies to provide these services for their employees.” She believes that Corporate America now realizes that there is a return on the investment in family services for their employees – in less absenteeism, increased productivity, and higher employee morale. The companies, founded about six weeks apart, were established on a similar principle: to provide top-quality services in the workplace child care market. Over the years, the companies became the industry leaders and increasingly were vying for the same types of clients, while striving toward the same goals. The heads of both companies had known each other personally and professionally for years, and finally decided that they could better achieve their goals if they started working together. The combined company would have revenues of $174 million. Linda Mason, president of Boston-based Bright Horizons, stresses that the merger is not an effort to spread costs. Although many mergers today are done to gain size, scale, or synergies or to consolidate a fragmented industry, this move is really a growth play. Nationwide Presence Is Crucial For the Roll-Out of Services Mason explains that many companies that want to provide work-site child care services for their employees look for a company that is national in scope. Companies tend to dip their toe in the water before taking the plunge into offering child care to all of their employees, and they usually establish child care centers at their headquarters then over time roll out additional centers to their satellite offices. They want to use the same service provider for all of their work sites, and therefore prefer to deal with a company that can serve them nationwide. The combined company would cover the country with more than 250 centers in 40 states and have the resources to serve more clients than the two companies could before the merger. There are few cost advantages to the merger, Mason says. About 75% of the companies’ costs go to labor costs, and the merger would do little to help the new company save on that expense. The combined company might realize a modest savings on insurance, because all of the professional and insurance fees would be consolidated, but insurance only represents about 1% of costs. The company would, however, save on public-company costs, such accounting and annual report fees. There are, however, operational and other benefits to the merger. The companies would use a cluster growth approach in operating their child care centers. Clusters of centers from both companies in the same geographic area would help each other in many ways, such as by sharing teacher and substitute pools. The new company also would be able to train clusters of staff from both companies’ centers instead of training site by site. A Merger Offers the New FirmBarrier-to-Entry Advantages Additionally, Mason notes, there are definite barrier-to-entry advantages in combining. She explains that if companies are looking into providing employer-sponsored child care, they rely heavily on recommendations from colleagues at companies with work-site care centers. Bright Horizons and CorporateFamily are top names in the industry, and the merger would bolster their name recognition and make it even harder for new companies to enter the market. Although the companies are the two largest in the industry, when combined they would have only 9% of the highly fragmented child care market. In addition to the half-dozen major companies in the U.S. that offer employer-sponsored child care, the company would still face competition from stand-alone, neighborhood child care providers and companies that establish and run their own work-site child care facilities. However, Sallee says, there are very few national child care companies that focus on the high quality end of the child care market. The more traditional approach to child care, since it is a relatively low-margin field, is for companies to hire lower-paid and less experienced staff, because it keeps their labor costs down. What differentiates Bright Horizons and CorporateFamily from many other companies is quality. They only hire trained professionals with impeccable backgrounds and credentials, their centers have good teacher-to-child ratios and group sizes, and their centers are conducive to safety and education. Most work-site child care centers are operated by the companies themselves. Both Mason and Sallee see those types of centers as a future source of business for Bright Horizons Family Solutions, since more and more companies are starting to outsource work that is not in their core competency. Child care is highly regulated, and companies in unrelated fields would face the complicated and time-consuming task of navigating the maze of regulations regarding child care. Work-site child care is a good example of a service that companies are likely to outsource rather than manage themselves. “Everybody wants to focus on their core competencies. Ten to 15 years ago, more companies provided child care themselves, but now there are alternatives,” Mason says. Although work-site child care is their core business, both companies have been moving steadily into other educational areas, such as consulting and employer-sponsored schools. CorporateFamily is active in consulting for companies that want to define their work-life strategies. The company works with senior-level management to establish employee-friendly work policies. Sallee and Mason think that one of the most interesting growth areas for the company is elementary-level corporate-sponsored schools, charter schools, and private schools. CorporateFamily and Bright Horizons currently are piloting several of those school models. Capitalizing on Core Strengths To Broaden the Array of Services The move from child care to elementary education was quite a natural development for the companies. Sallee says that the companies’ greatest strength is hiring and training faculty, and both companies enjoy great loyalty from parents whose children receive work-site care. The companies decided to capitalize on their strengths and parent loyalty and move into the broader education sector so that they could serve employees’ children “from birth to fifth grade.” Bright Horizons will open a private elementary school in Seattle in the fall. One company working with CorporateFamily wants to sponsor a charter school, and another wants to set up an on-site elementary school. In some cases, companies would limit enrollment in their schools to their employees’ children. In other instances, corporate-sponsored charter schools would open their enrollment to the broader community in which they are based. Sallee notes that an interesting, unexpected outcome of a work-site school is that the student population turns out to be more diverse than that from the average neighborhood school, because it is made up of the children of a diverse workforce; employees of all income levels from diverse neighborhoods are at the workplace. “In that sense, the corporation becomes the new American neighborhood,” she says.