WHEELING & DEALING
If It Walks Like A Deal
By Jean-Marc Levy

First published in HRO Today (March 2003)
 

We'll see more ACS/Motorola-type pacts, as traditional I.T. outsourcers and BPOs claim their share of the HR BPO Market.

In December 2002, one of the largest deals of the year in the HR outsourcing industry was announced. It wasn’t a large M&A deal or merger. It wasn’t a sizable investment by one of the mega-VCs I have written about in previous columns. It certainly wasn’t the IPO of a blazing new HR outsourcing startup.

Instead, the announced deal was a $650 million HR outsourcing contract with a twist under which Affiliated Computer Services (ACS), the Dallas-based BPO and IT-outsourcer agreed to take over the HR services functions of Motorola, along with 600 Motorola employees. The twist is that ACS intends to create a new business unit, ACS Global HR Solutions, which will house the Motorola employees along with some of ACS’ existing BPO assets, creating overnight a significant competitor to Exult and Accenture, the only other players in the HR BPO segment having achieved real critical mass to date. Motorola wins on two fronts, achieving very attractive cost savings and, under the terms of the announced deal, participating in the upside of the newly created business.

This is not a radically new deal structure for HR outsourcers or for outsourcing and shared services providers in general. In fact earlier in 2002, Fidelity Investments played the ACS part and IBM played the Motorola part in the announcement of a variation under which IBM would outsource to Fidelity the administration of its pension and benefits plans (along with a broad range of HR services) while in a “related” deal, IBM Global Services and Fidelity would form a relationship to market HR payroll and benefits outsourcing services.

As reported earlier in this magazine, IDC projects that HR BPO will remain the fastest-growing segment in HR services in 2003, growing 35% to $7.7 billion (on the heels of a 39% increase in 2002). With such a fast growing market, in which getting to critical mass as fast as possible is the name of the game, I have a hunch that we will see a lot more of these deals coming down the pike, as traditional IT outsourcers and BPOs claim their share of the HR BPO market.
 

NOTABLE TRANSACTIONS

Payroll players ADP and Ceridian both made M&A headlines in the past few months, but with very different strategic objectives. ADP took out a major competitor and increased its payroll processing share of market with the announced $500 million acquisition of ProBusiness Services, while Ceridian hoped to leverage its transaction processing competencies to areas of the employee management chain beyond payroll with the acquisition of GLS Benefits Services, a provider of outsourced employee benefits administration services.

While the Ceridian deal is a much smaller transaction, it is significant as making good on Ceridian’s strategic commitment to expanding beyond payroll processing services. Not a bad commitment since by some estimates, Ceridian could hope to generate 40% to 45% more revenue per employee served in benefits administration services than in payroll processing services.
 

DEAL-MAKER OF THE MONTH

In my last column, I mentioned that First American Corporation had been a very active acquirer in the employee screening space, purchasing Employee Health Programs to round up the offering built in its Screening Information Group around the acquisitions of American Driving Records and of several regional employment screening companies over the past few years.

This month, First American is being promoted to “Dealmaker of the Month” status after going one step further and announcing an agreement to merge its Screening Information Group with US Search.com, a publicly traded competitor. The combined businesses are expected to be spun off into a new publicly held company called First Advantage Corporation and into which First American would retain 80% ownership. John Long, president of First American’s Screening Information Group would become CEO of the combined businesses. If management’s past behavior is a predictor of future activity, it is very likely that First Advantage will become in turn a very active dealmaker in the screening space, following in the footsteps of parent First American.