ADP Automatic Data Processing Inc

Automatic Data Processing Inc. (ADP) recently announced the acquisition of privately held Asparity Decision Solutions. However, financial terms of the transaction were not disclosed.

Durham, North Carolina-based Asparity offers solutions for both employees and employers. Asparity’s employee benefits decision support tool known as PlanSmartChoice is currently used by more than 100,000 federal employees, who participated in the Federal Employees Health Benefits (FEHB) program in 2011.

Asparity boasts an enviable clientele, including FORTUNE 1,000 companies and public-sector employers. The company offers advanced software and technologies, which help employers to design effective benefit strategies for employees.

The recent health care reforms and complex regulations related to the Patient Protection and Affordable Care Act (PPACA) has complicated the benefit administration of many companies. Employees are also facing increasing difficulties in selecting the appropriate benefit plan for themselves and their families that could maximize their take-home salary and simultaneously reduce the cost-burden on their employers.

We believe that the acquisition will expand ADP’s benefits administration service offerings going forward. ADP will be able to use Asparity’s decision support tools and expertise in analyzing and understanding employee health care preferences, which will in turn help the company to deliver better solutions to its customers.

The acquisition will also broaden the scope of ADP’s recently launched Strategic Advisory Services group, which is expected to provide clients direct input and analysis of the constantly changing benefits administration process.

Our Take

ADP’s growth in recent years has been significantly driven by accretive acquisitions. ADP made several acquisitions in fiscal 2011, including MasterTax, Cobalt and AdvancedMD. ADP spent approximately $776 million in new acquisitions in 2011. The company reported a year-over-year upside of 11.0% in revenue to $9.88 billion in fiscal 2011, driven by a 4.7% growth from the acquired businesses.

We believe the new acquisition will drive top-line growth going forward. Moreover, we believe this acquisition will help ADP to counter significant competition from Paychex Inc. (PAYX) and Insperity Inc. (NSP) going forward.

However, a gloomy macro outlook in North America and Europe keeps us on the sidelines for the time being.

We maintain a Neutral rating over the long term (6-12 months). Currently, Automatic Data Processing has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

 
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