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ADP Buys SHPS Subsidiary

Automatic Data Processing Inc. (ADP) recently announced that it has completed the acquisition of the human resource subsidiary of SHPS. However, the terms of the deal were not disclosed. The recent takeover marks ADP’s third acquisition in the last four months of 2012.

Louisville, Kentucky-based SHPS offers employee benefit programs and benefit administration services. This is not the first acquisition of its kind, as even last year ADP acquired privately held Asparity Decision Solutions, a well known provider of employee benefit solutions. The acquisitions are in fact reflective of ADP’s decision to expand its portfolio in the benefit administration segment.

The ongoing health care reforms and complex regulations related to the Patient Protection and Affordable Care Act (:PPACA) has complicated 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.

SPHS Human Resource Solutions are a strategic fit for ADP, as they not only expand the company’s benefits portfolio but also enhance its exposure to new areas of absence management and reimbursement solutions. We believe that the addition of SPHS human resource subsidiary will boost ADP’s clientele growth going forward.

As such ADP’s growth in recent years has been largely driven by accretive acquisitions, for which it has spent approximately $776 million in 2011 itself. If the latest acquisitions are anything to go by, then the company clearly intends to tread the same path in 2012.

In February, the company acquired privately held PhyLogic Healthcare LLC, a well-known provider of revenue cycle management (:RCM) and medical billing outsourcing services. The acquisition was made to augment ADP’s position in the rapidly growing U.S. RCM market. According to ST Advisors, LLC, the RCM market is expected to grow from approximately $4 billion in 2010 to more than $9 billion by 2018, driven by the upcoming medical reimbursement regulation changes.

In early January, ADP entered the lucrative Indian market with the acquisition of Ma Foi Consulting Solutions Ltd, an Indian human resource and payroll management company. The acquisition should be beneficial for the company as it will facilitate further expansion in developing markets. Through this acquisition, ADP will gain access to the growing market of human resource business process outsourcing (HR BPO) in India.

We believe that the back-to-back acquisitions will drive top-line growth for fiscal 2012 and beyond. The acquisitions are expected to diversify ADP’s revenue base, which in turn will help the company to outperform the market, in our view.

However, increasing competition from Paychex Inc. (PAYX) and Insperity Inc. (NSP) and a gloomy macro outlook in North America and Europe are major headwinds over the near term. Additionally, higher unemployment rates and low interest rates remain concerns for the company’s payroll processing business.

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

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