Does the current spate of mergers in the recruitment market spell the beginning of a period of domination for a few recruiter giants or will opportunities be opened up for the competition? Sarah Coles investigates

The mega-mergers currently shaking the recruitment market have ambitious aims. They intend to boost profits, cut costs, create new markets and rehabilitate the share price. The jury is still out, however, on whether they will create new behemoths to dominate the market, driving competition up and margins down, or whether flaws at the heart of the deals will create opportunities for the competition instead.

At the moment two of the largest recruitment company mergers in a decade are going through, the purchase of Vedior by Randstad Holding, and the purchase of Corporate Services Group by Carlisle Group.

The Randstad deal, announced in December, will create the world's second-largest staffing company, after Adecco, including brands such as Select Appointments, Hill McGlynn and Joslin Rowe. Ian Jermin, support services analyst at investment bank Landsbanki Securities (UK), told Recruiter: "It was a quick way of increasing the scale of the business, expanding its geographical reach and the number of disciplines it deals with." Randstad already has 17,570 employees and £9.2bn in revenues, and will be adding another 16,600 staff and revenues of £8.4bn from Vedior.

Randstad chief executive Ben Noteboom has previously stated the company's "ambition to become the world's number one".

The combined company hopes to benefit from economies of scale. Randstad, based in the Netherlands, has already closed a number of UK outlets and expects to shut more once the deal is complete in April. It aims to cut costs by 80m euros a year as a result of the takeover.

These cost cuts are clearly realistic. However, Randstad has also stated that one advantage of scale will be increased pricing power. This is less clear. Jermin warned: "That depends on being in a candidate-driven market, and that's not true at every stage in the cycle."

The future strategy of the combined entity remains under wraps, but Randstad has revealed it hopes to move towards Vedior's placement model, focusing on skilled workers. This makes up a third of the company's revenue, and is a faster-growing and more profitable market than the traditional temp base.

Competition to be in this market is high. Jermin said: "There is a desire among major staffing companies to move to professional services, which is a higher-margin business." Should the newly merged company take a substantial stake in this market, it could make life more difficult, and pricing more keen, for its competitors.

The Carlisle purchase of CSG, meanwhile, will bring together Carlisle brands such as Celsian, Chadwick Nott and Recruit Employment Services, and CSG companies such as Blue Arrow, Medacs and Comensura. It has stated a number of aims. It, too has referred to the advantages of economies of scale. "Commercially, it will create a diversified business with total revenues approaching £1bn, with an increased number of brands operating across a range of staffing sectors," claimed CSG chief executive Desmond Doyle recently.

It also hopes to refinance as a result of the deal and therefore reduce its borrowing. Loans are holding companies back, as the cost of borrowing rises, and businesses with a lot of borrowing are suffering a mauling in the markets. Doyle said: "We are a highly leveraged business. That was fine in the good times, but we need to be more sensible now, although the economic situation is not as bad as it would seem from reading the press."

A refinanced business will also be in a position to consider further acquisitions. Doyle has told reporters that the deal will allow the merged company to "move more quickly to build through acquisitions".

This deal could, therefore, herald a new era for the recruitment market. Jermin said: "Deals in the sector over the last couple of years have tended to be the taking out of vulnerable companies by companies taking advantage of low share prices. These are the first consolidation plays for increasing scale."

Kean Marden, head of research at Kaupthing Singer & Friedlander, told Recruiter: "When the economic cycle becomes tougher it's less easy to grow organically, so companies tend to turn to M&A." And he thinks the trend will continue: "More consolidation wouldn't be entirely surprising." Jermin agreed: "We expect more growth plays. Spring Group may well be interested later in the year."

The Carlisle deal, which will see the formation of a new business called Impellam, listed on the Alternative Investment Market in London, also aims to "rehabilitate CSG from its position as a penny stock", according to Doyle. This aim, however, has been met with caution. Marden says: "I'm always concerned when liquidity is mentioned as a driver for an acquisition. Corporations should acquire companies on the merits of the combination rather than just to get large enough to get more attention from the markets."

This isn't the only problem with the deals. The Randstad purchase, in particular, has received its share of scepticism. Jermin explained: "Culturally it could be difficult. Vedior has been built up through numerous acquisitions. The management of the subsidiaries have a stake in the company. It keeps the entrepreneurial flair going. Randstad operates a completely different model, and integrations could be a challenge."

Marden told Recruiter: "It wouldn't surprise me if some parts of the Vedior Group, or individuals, look for opportunities outside the group."

So the effect on the market, rather than simply seeing the large companies grow larger and dominate more, may also hold opportunities for the competition.