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ADP Can Become a Powerhouse Through Acquisitions

Posted on Monday, Nov 5th 2007

In a recent post, I covered Paychex. This post will look at its largest competitor, ADP.

Automatic Data Processing, Inc. (NYSE: ADP), with nearly $8 billion in revenues, 46,000 employees, and around 585,000 clients in fiscal 2007, is one of the world’s largest providers of business process outsourcing solutions. ADP offers a wide range of HR, payroll, tax and benefits administration solutions to companies of all types and sizes. ADP is also a leading provider of integrated computing solutions to auto, truck, motorcycle, marine and recreational vehicle dealers. Its business is organized into three segments: Employer Services, Professional Employer Organization (PEO) Services and Dealer Services.

Employer Services offers HR solutions like payroll processing, tax and benefits administration solutions, both traditional and Web-based. It has over 560,000 clients in the United States, Canada, Europe, South America (primarily Brazil), Australia and Asia.

PEO Services provides over 4,500 small and medium sized businesses with employment administration outsourcing solutions through a co-employment relationship. These solutions include payroll, payroll tax filing, HR guidance, 401(k) plan administration, benefits administration, compliance services, and health and workers’ compensation coverage.

Dealer Services provides integrated dealer management systems to over 25,000 automotive, heavy truck and powersports dealers in over 50 countries.

The Company acquired eleven businesses in fiscal 2007 for approximately $434.4 million. These include Employease, Inc., a leading on-demand service provider of web-based solutions for HR and benefits professionals; VirtualEdge Corporation, an on-demand provider of talent lifecycle management solutions for HR organizations; the fully-outsourced payroll business of Intuit.; the tax incentives business of Mintax, Inc.; and Taxware, LP, a leading provider of tax content and compliance solutions for sales, use and value added tax. Looks like ADP has identified on-demand / SaaS as a growth area, and has already started making its moves in that direction.

On March 30, 2007, it spun-off its former Brokerage Services Group (BSG) business into an independent publicly traded company called Broadridge Financial Solutions. It also divested non-strategic and slow-growing businesses of Sandy Corporation, a Dealer Services business, in January 2007 and the Travel Clearing business in July 2007.

Using the money from the BSG spin-off, ADP bought back over 40 million shares of its common stock for treasury at a cost of over $1.9 billion and increased the cash dividend 24% during fiscal 2007.

On the financial front, ADP reported a 13.5% increase in revenue to $2 billion for the first quarter of fiscal 2008. Net earnings from continuing operations grew 10% and diluted EPS was $0.45, a 15% y-o-y increase from $0.39. Excluding the net one-time gain in last year’s first quarter, diluted EPS increased 25%, and pretax and net earnings both increased 21%.

Segment-wise, Employer Services showed 11% growth in revenue, with 9% organic growth and 8% growth in our traditional payroll and tax filing business in the US. Beyond Payroll revenues grew 18% in the U.S. with strong performance from Employease and VirtualEdge acquisitions. PEO saw a revenue growth of 21%. Dealer Services had a revenue growth of 8%, with 6% organic growth.

ADP bought nearly 11 million shares of its stock in the first quarter for approximately $514 million. Its stock is currently trading around $48 after hitting a 52-week high of $51.5 in February. Its market cap is around $25.5 billion.

It would be very interesting to watch if ADP’s acquisition spree continues to embrace some of the Indian BPO efforts that would add some very high-growth components to the company’s portfolio. Meanwhile, ADP remains one of the most well-respected BPO vendors in history. With the addition of SaaS and off-shore BPO businesses, ADP could become an absolute powerhouse over the next decade.

Automatic Data Processing, Inc. (ADP)

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