Executive Summary / Key Takeaways

• A Transformational Cleanup Now Bearing Fruit: Heidrick & Struggles' tumultuous 2024—marked by $59.6 million in goodwill impairments, a $6.9 million restructuring charge, and substantial leadership changes—was necessary surgery to remove legacy baggage and position the firm for a diversified future, with Q3 2025's 15.9% revenue growth across all segments validating this painful but essential reset.

• The "Always-On" Advisory Moat: The company's strategic pivot beyond transactional executive search toward embedded leadership partnerships—powered by Heidrick Connect, OneSearch platform, and integrated consulting services—is creating stickier, more defensible client relationships that could drive recurring revenue and margin expansion, though this model remains unproven at scale.

• Profitability Inflection in Non-Search Segments: On-Demand Talent achieved a $4.3 million Adjusted EBITDA profit through nine months of 2025 (versus a $0.8 million loss in 2024) while Heidrick Consulting's losses narrowed 23.4%, demonstrating that HSII's diversification strategy is moving from concept to cash flow generation.

• Fair Value at $59, But Not a Windfall: At 8.03x EV/EBITDA and 34.28x P/E, the pending $59 per share cash acquisition by Heron BidCo appears to fairly price the business's improved trajectory while leaving meaningful upside for private equity if execution continues to strengthen, particularly given the firm's $528 million cash hoard and zero-debt balance sheet.

• Execution Risk Remains the Central Variable: The investment thesis hinges on whether management can deliver on its technology roadmap and achieve Korn Ferry (KFY)-like margins (17.1% EBITDA margin versus HSII's 10.6%) while navigating cyclical search headwinds and emerging competitive threats from AI-driven recruitment platforms.

Setting the Scene: From Search Firm to Leadership Operating System

Founded in 1953 in Chicago, Illinois, Heidrick & Struggles spent seven decades building one of the world's most trusted executive search franchises. For most of that history, the business model was elegantly simple: clients paid retained fees based on one-third of estimated first-year compensation for placed executives, with engagements spanning approximately six months from confirmation to completion. This created a high-margin, relationship-driven business—but one inherently vulnerable to economic cycles and prone to lumpiness in revenue recognition.

The leadership advisory landscape has fundamentally shifted. Great leadership talent is in chronically short supply, while volatility, demographic headwinds, and AI-driven organizational redesign have made leadership decisions an "always-on" activity rather than a periodic necessity. Clients no longer just need a new CEO every five years; they require continuous pipeline management, interim leadership for transformation initiatives, and data-driven assessment of team effectiveness. This structural shift created both an existential threat to pure-play search firms and an opportunity for those agile enough to evolve.

HSII's response has been strategic and surgical. The 2024 goodwill impairments—$14.8 million for On-Demand Talent and $43.3 million in the annual evaluation—were not random write-downs but acknowledgments that acquired capabilities needed integration and focus. The concurrent $6.9 million restructuring and workforce reduction eliminated legacy cost structures while the "substantial leadership changes" brought in talent aligned with a diversified vision. This cleanup was essential because the market was not going to wait for a 70-year-old search firm to gradually adapt.

Technology, Products, and Strategic Differentiation: Building the "One Heidrick" Platform

The company's technology investments are not about building a better applicant tracking system—they're about creating an integrated leadership operating system that embeds HSII into clients' daily decision-making. Heidrick Connect, the digital client experience portal, and the OneSearch platform represent a deliberate move from episodic transactions to continuous engagement. When management notes they've "launched a couple of new tools on our OneSearch platform that enable our teams to do a better job of partnering with our clients," the subtext is clear: HSII wants to become the system of record for leadership decisions, not just a vendor for leadership placements.

This matters because it fundamentally changes the revenue model. Traditional search is project-based and zero-sum: you either win the engagement or you don't. An integrated platform creates subscription-like relationships where clients access assessments, on-demand talent, and consulting services as part of an ongoing partnership. The 13% increase in R&D spending to $6.4 million in Q3 2025, while modest in absolute terms, signals management's recognition that technology-enabled stickiness is the only defensible moat in an industry facing disruption from AI-driven recruitment tools.

The Heidrick Consulting segment's pivot toward "leadership assessment, development, and performance culture" complements this strategy. By refining and simplifying offerings to focus on core strengths, HSII is building capabilities that are harder to replicate than candidate sourcing. When a client uses HSII for succession planning and team effectiveness, they're not just buying a service—they're embedding the firm's intellectual property into their organizational DNA. This creates switching costs that pure search competitors like Russell Reynolds and Spencer Stuart cannot match with their narrower service portfolios.

Financial Performance: Evidence of a Working Transformation

HSII's Q3 2025 results provide the first clear evidence that the transformation is working. Consolidated net revenue increased 15.9% to $322.8 million, with all three segments delivering double-digit growth. Executive Search, the legacy core, grew 17% to $239.1 million, driven by a 7.1% increase in confirmations and higher average revenue per search ($162,000 versus $149,000). This demonstrates that the search business isn't collapsing—it's actually strengthening, even as the company diversifies away from it.

The real story lies in the non-search segments. On-Demand Talent grew 10.1% to $50.9 million and generated $2.8 million in Adjusted EBITDA (5.6% margin) in Q3 alone, a dramatic improvement from the $1.8 million profit in Q3 2024 and the $1.2 million loss in Q4 2024. This segment is scaling profitably, validating management's claim of "continued outperformance amid market dynamics" despite the broader temporary staffing space experiencing a projected 10% revenue drop in 2024 according to SIA. HSII's ability to grow while competitors contract suggests genuine differentiation in serving interim leadership roles that clients deem non-discretionary.

Heidrick Consulting's 17.6% revenue growth to $32.8 million, accompanied by a narrowing Adjusted EBITDA loss, shows similar momentum. The segment's path to the 11-13% long-term margin target remains visible, though not linear. The Q3 loss of $1.9 million (5.7% margin) compares favorably to the prior year's $1.0 million loss (3.7% margin), and management's commentary about "refining and simplifying offerings" indicates disciplined focus rather than undisciplined growth.

However, the consolidated Adjusted EBITDA margin compressed to 10.6% from 10.9% year-over-year, and Search margins dipped to 24.0% from 24.8%. This reflects strategic investments in hiring and technology that management explicitly frames as second-half headwinds setting up 2026 growth. The 19% increase in salaries and benefits—split between $8.9 million in fixed compensation and $25.9 million in variable compensation—shows HSII is paying up for productivity, with consultant productivity rising to $2.3 million annualized from $2.0 million. This is the right trade-off: margin compression today for talent acquisition that drives revenue growth tomorrow.

Outlook and Execution: The Path to Korn Ferry-Like Margins

Management's guidance for Q3 2025 revenue of $295-315 million (midpoint up 9.7% year-over-year) and full-year Adjusted EBITDA margin expansion suggests confidence in the trajectory, even as they acknowledge "the uncertainty of the macro certainly doesn't seem to be going away." The key assumption is that hiring investments made in the first half will pressure second-half margins but "set us up well for the growth" in 2026.

This hiring strategy—focused on early-career talent development and selective senior lift-outs—is critical because HSII's scale disadvantage versus Korn Ferry (which generated $668.7 million in fee revenue with 11.26% operating margins) stems partly from lower consultant productivity and higher relative fixed costs. Korn Ferry's diversified model includes more scalable digital and consulting arms that generate higher margins. HSII's path to closing this gap requires not just growing revenue but improving operational leverage, which can only come from a larger, more productive talent base.

The company's balance sheet provides strategic flexibility that competitors envy. With $528.1 million in cash and marketable securities, zero debt, and a $100 million undrawn credit facility, HSII can invest through cycles while Russell Reynolds and Spencer Stuart lack comparable resources.

The $20.8 million remaining share repurchase authorization (unused in 2025) and consistent dividend payments (1.02% yield, 34.88% payout ratio) demonstrate capital discipline, though the pending merger makes buybacks irrelevant.

Risks: Where the Transformation Thesis Can Break

The most material risk is execution on the technology roadmap. While HSII is investing in Heidrick Connect and OneSearch, competitors like Korn Ferry have more mature digital platforms and proprietary assessment tools. If HSII's technology investments fail to create truly differentiated, sticky client experiences, the "always-on" advisory model becomes merely a more expensive way to deliver traditional services, compressing margins without generating recurring revenue.

Cyclicality remains a fundamental vulnerability. Management's candid observation that "the work in search is 'not discretionary'" rings hollow when they simultaneously note that "client demand can push back" and projects can delay. In a severe downturn, even mission-critical leadership searches get postponed, and the newer consulting and on-demand segments may not be mature enough to offset search declines. The 2024 impairments were partly driven by "a reduction in the On-Demand Talent reporting unit forecast," proving these segments aren't immune to macro pressures.

The pending merger itself introduces risk. While the $59 per share cash price provides a floor, the deal requires stockholder and regulatory approvals, and failure to close could trigger a $38.9 million termination fee and leave the company exposed to market volatility. More concerning is the restrictive covenant that "limits its ability to pursue certain business opportunities, strategic transactions, financing activities, or operational changes without Parent's consent," potentially hampering management's ability to react to market changes during the interim period.

Competitive disruption from AI-driven recruitment platforms represents an emerging threat. While HSII's high-touch model serves C-suite roles where judgment and relationships matter, AI tools are rapidly encroaching on mid-level executive search. If technology gaps widen, HSII could find itself defending an ever-shrinking premium segment while competitors capture scalable volume.

Valuation Context: Pricing the Transformation

At $58.97 per share, HSII trades essentially at the pending $59 acquisition price, implying the market views the deal as highly likely to close. The valuation multiples reflect a business in transition: 34.28x P/E and 8.03x EV/EBITDA compare to Korn Ferry's 14.09x P/E and 8.62x EV/EBITDA, suggesting HSII's earnings quality is perceived as lower or more cyclical. Korn Ferry's superior operating margin (11.26% versus 5.93%) and return on equity (13.90% versus 7.47%) justify this discount, but HSII's faster growth (15.9% versus flat) and cleaner balance sheet (0.20 debt/equity versus 0.30) provide counterarguments.

The enterprise value of $799.48 million represents just 0.66x revenue, well below Korn Ferry's 1.19x, reflecting HSII's lower margins and smaller scale. However, the $528 million cash hoard means 66% of enterprise value is net cash, giving private equity sponsor Heron BidCo substantial flexibility to fund growth investments or extract value through dividends. The 9.26x price-to-free-cash-flow multiple is attractive relative to Korn Ferry's 12.38x, suggesting the deal price captures HSII's cash generation without fully pricing the margin expansion potential.

The 1.02% dividend yield and 34.88% payout ratio demonstrate returning cash to shareholders, but the real value lies in the transformation story. Private equity is essentially paying a modest premium for a business that, if it achieves Korn Ferry-like margins, could be worth 50-70% more within 3-5 years. The key question is whether the 2025 performance represents a sustainable inflection or a cyclical peak.

Conclusion: A Fair Deal for a Work in Progress

The $59 per share acquisition price fairly values HSII's demonstrated progress in transforming from a cyclical search firm into a diversified leadership advisory platform, while leaving meaningful upside for private equity if execution continues to improve. The Q3 2025 results provide compelling evidence that the 2024 cleanup was necessary and effective: all three segments growing double-digits, On-Demand Talent achieving profitability, and technology investments creating the foundation for stickier client relationships.

However, the transformation remains incomplete. HSII's margins still trail Korn Ferry significantly, the "always-on" advisory model is unproven at scale, and technology gaps expose the firm to competitive disruption. The investment thesis hinges on whether management can deliver on its roadmap while navigating cyclical headwinds and macro uncertainty.

For investors, the critical variables are the pace of margin expansion in non-search segments and the durability of search revenue growth amid AI-driven disruption. If HSII can achieve its 11-13% long-term consulting margin target while maintaining search productivity above $2.3 million per consultant, the private equity buyers will have secured a bargain. If execution falters, the $59 price may prove to be the fair value for a business that remains fundamentally cyclical and vulnerable to technological disruption. The merger agreement removes near-term volatility, but the underlying transformation story will determine whether this is the end of HSII's public journey or merely a chapter in a longer value-creation story.