Why ADP Should Buy Hewitt?

I was recently reading an article in Forbes about ADP's incoming CEO, Gary Butler, and some of the changes that may be in store when he takes over in August.  Although he states in the article that he has, "...minimal interest in acquisitions that are dilutive beyond a year", I would like to throw out why an acquisition of Hewitt may make sense...

• ADP has cash and lots of it (nearly $3 billion at last glance); Hewitt has a strained balance sheet and is basically undervalued at this point (trading at 1x multiple).  Investors want ADP to either start spending the money or return it to the shareholders

• ADP must start investing that cash towards growth opportunities; HRO is a growth opportunity and ADP has proven the ability to build a scalable, profitable business

• ADP is playing catch up in HRO; Hewitt is the recognized market leader (profits withstanding)

• ADP owns the mid-market; Hewitt is strong with F1000

• ADP rules the payroll world; Hewitt's strength resides in benefits and consulting

• ADP is not a technology company; they should not be looking at technology acquisitions (which they have been recently)

Having said all that, acquisitions and especially those of larger proportion, typically fail (78% fail to be precise).  At least worth consideration or some engaging discussion among the industry watchers.

Comments

[Phil Fersht]

Jason,

Excellent insight here on a much-debated topic. I agree that an ADP-Hewitt entity would be a very strong market proposition if they can bring an integrated benefits-payroll platform into play complemented with HR domain skills.

My question would be how ADP would tackle Hewitt's inherited Exult clients. They have limited experience managing enterprise-level accounts with such complex multi-functional HR and IT requirements, and would need to invest significantly to develop leverage points across these. The whole concept of complex HRO at the F500 global level requires hugely complex operational and technical skills that even the global outsourcers have found massively challenging in recent years - and they have the scale and resources to address these chalenges. ADP has mastered the mid-market 1-many model with simple, payroll-centric offerings, and they would need significant investment and scale to take on Hewitt's clients at present.

ADP also needs to evalute the BPO market at large to understand where they want to play. Payroll is the bridgeing function across HR, finance and procurement functions, and with an increasing number of FAO deals incorporating payroll with financial processes, ADP needs to position itself correctly here and not get totally sidetracked by HRO at this juncture. It's GlobalView solution could become a broader BPO platform as outsourcing offerings become more broadly encompassing across business functions.

[Thomas Otter]

Jason.
I wouldn't buy Hewitt if I was Gary.
Hewitt, partly via the exult acquisition, has a mass of one-to-one HR applications that are very difficult to bring together and extract much scale out of, and contracts that arent profitable.

With Cyborg, they have an ancient application that they rescued from oblivion.

What is there to buy?

ADP'S recent deals with Microsoft, Ikea and several others show that they can win the global stuff.

The future of BPO is powered by standard applications, not a strung together mix of bits and pieces of ancient apps. ADP get this, hence global view.

If I was ADP, I would buy in and build a strong ecosystem of smaller partners. Guys who understand HR and Technology, but who can't scale like ADP.

Accenture's acquistion of Pecaso was very astute. There are a number of other firms with similar track records and size that would be a good match for ADP.

ADP is a great business, maybe they should spend some of that war chest telling the market about it. ADP understands how to make a profit in this space, not many others seem to.

ADP is my tip for the SaaS champion play. They will do the service bit, and SAP the software.

I've talked quite a bit about the SAP-ADP relationship on my blog. (shameless punt)

http://theotherthomasotter.wordpress.com/2006/06/01/saas-i-dont-really-get-it/

http://theotherthomasotter.wordpress.com/2006/05/17/adp-and-sap/

[Chris Brown]

Thomas,

Addressing just one point because it is a common misconception -- there is much more to the "venerable" Cyborg at Hewitt than meets the eye. The legacy code is indeed used for payroll but the HRMS codebase is not as bound to that as it would seem at first blush.