$CBZ: stop the buybacks and restart the M&A flywheel? | Reference Equity

Episode Summary

Executive Summary: Andrew Walker interviews Ryan Bunn of Reference Equity about CBIZ (CBZ) and Bunn’s campaign to change its capital allocation. Bunn argues the company should stop share buybacks, pay down debt, and ultimately restart its historical M&A-driven “flywheel,” while Walker probes whether buybacks are better, whether AI threatens the business, and whether management/board are the right stewards.

Main Topics: CBIZ business overview and industry position (Priority: 5/5): Ryan frames CBIZ as a middle-market professional services platform providing tax, audit, accounting, payroll, benefits, and technology services. He emphasizes its scale, recurring revenue, and ranking as a leading tier-two firm behind the Big Four. Capital allocation campaign: stop buybacks, restart M&A (Priority: 5/5): Bunn’s core proposal is that CBIZ should halt share repurchases, reduce leverage, and return to small, accretive acquisitions that historically fueled growth and compounding. AI risk, AI opportunity, and industry consolidation (Priority: 5/5): The discussion explores whether accounting and related services are vulnerable to AI displacement, or whether AI will accelerate consolidation and favor well-capitalized firms like CBIZ. Markham acquisition and post-deal integration issues (Priority: 4/5): They debate the large Markham deal: its strategic benefits, the integration challenges, leverage taken on, and whether it should be seen as a success or a cautionary tale. Valuation and leverage dynamics (Priority: 5/5): Bunn argues the stock is cheap but constrained by 3.4x leverage; Walker challenges whether de-leveraging will really drive multiple expansion or whether the market is primarily pricing AI risk. Management, board quality, and alignment (Priority: 4/5): They discuss CEO Jerry Grisco, the long-tenured management team, and concerns about an older, staggered board with limited ownership overseeing a rapidly changing business. Equity issuance as a financing tool (Priority: 3/5): Bunn suggests raising equity from long-term investors could accelerate deleveraging and support future M&A, while Walker questions whether such capital can be raised without a discount.

Key Arguments: CBIZ is a high-quality, recurring-revenue people business with strong client retention and a long history of compounding through small acquisitions. Bunn argues buybacks at current prices are less accretive than returning to M&A because CBIZ can buy businesses at attractive EBITDA multiples and cross-sell services. He believes the company is over-levered at roughly 3.4x and should prioritize deleveraging to reduce risk and restore strategic flexibility. Bunn contends AI could accelerate consolidation by weakening smaller firms and that CBIZ’s broad service suite and client relationships position it to benefit. Walker argues the market may be pricing not just leverage but also existential AI risk, especially given accounting/offshoring automation concerns. Walker pushes the idea that star accountants and Big Four firms could use AI to compete more directly for the same middle-market clients, pressuring CBIZ from above and below. Bunn responds that the Big Four’s brand premium and profitability may make them slower to price aggressively into middle-market work, giving CBIZ room to compete. Walker questions whether the Markham deal proved management’s limits and whether the strategic boxes it checked reduce the case for restarting an acquisition program. Bunn says the key mistake was not the strategic logic of Markham, but the financing and subsequent decision not to delever quickly enough. Both agree the business would be more attractive with less leverage, but differ on whether buybacks or renewed M&A are the better long-term capital deployment. Bunn believes raising capital from patient investors could make CBIZ more investable and speed the path back to M&A, though he ultimately says the most important change is ending the current muddled capital allocation plan.

Data Points: Employees: 9,500 - CBIZ workforce across the U.S. Clients served: 130,000+ - Scale of CBIZ’s customer base. Metro areas: 23 major metro areas - Geographic footprint in the U.S. Industry ranking: #7 - CBIZ’s position among tier-two accounting/professional services firms. Recurring revenue: 72% - Portion of revenue described as recurring. Client retention rate: 90%+ - Bunn cites strong retention as evidence of business quality. Revenue growth (10 years): 13% per annum - Bunn cites historical growth driven by M&A and organic execution. EBIT margin expansion: 9% to 14% - Margins expanded over the last decade. Profit growth: Nearly 20% - Bunn’s characterization of long-term profit growth. Leverage: 3.4x - Current leverage level Bunn says is too high. Interest expense: 6.5% - Approximate cost of debt used in the capital allocation discussion. Valuation multiple: 9x earnings / 9x free cash flow - Trading valuation referenced repeatedly during the discussion. Recent buyback pricing: 72, 67, 52 - Prices at which CBIZ repurchased shares in 2025, per Bunn. Buyback opportunity window: February through June 2025 - Period when buybacks were described as especially accretive. Acquisition return (historical): ~9% unlevered - Bunn’s estimate of historical M&A returns over the last 10 years. Acquisition returns (levered): Double-digit - Bunn argues leverage can lift M&A returns. Markham deal size: $2.3 billion - Large acquisition discussed as the recent strategic turning point. Equity issued for Markham: 13 million shares - Part of the acquisition financing. Debt paydown target: $325 million - Amount management said it needs to pay down to reach its leverage target. Potential leverage target: 2.5x - Management’s target leverage level discussed on the podcast. Share repurchase amount: $160 million - Bunn cites 2025 buybacks as a misstep. Potential buyback ownership: 50% - Bunn’s hypothetical over five years if buybacks continue at current pace. Possible EPS boost from buybacks: ~11% annually - Bunn’s estimate of share-count reduction effect at 9x FCF. Potential base-case return: ~13%+ annualized - Bunn’s rough compounding estimate including growth and capital deployment. Offshore work: 6% to 10%, potentially 20% - Walker cites CBIZ’s offshoring trend as a sign of AI/automation exposure.

Pivotal Quotes: "Restarting the Flywheel" — Ryan Bunn: Name of Bunn’s campaign urging CBIZ to stop buybacks, delever, and return to M&A. "I think the market is very clearly telling this business: we strongly dislike you at three and a half times earnings." — Ryan Bunn: Bunn explains why he thinks leverage is driving the stock’s discount. "The talent walks out the door every night" — Andrew Walker: Walker raises the classic people-business risk: key producers can leave and take clients with them.

Implications: The episode frames CBIZ as a high-quality but strategically constrained compounder. Its future depends on whether management treats buybacks as the best use of cash or pivots back to M&A while navigating leverage, talent retention, and AI-driven disruption across professional services.