As reported by ComputerWire earlier this week, Dallas, Texas-based ACS emerged as the front-runner to acquire Mellon’s Human Resources & Investor Solutions (HR&IS) business. ACS was expected to acquire the full HR&IS business, which made revenue of $918m in 2004, however, under the terms of the announced deal, ACS will only be acquiring the consulting and HR outsourcing units. These together account for 72% of the total HR&IS or $660m.
Through the deal, ACS will take on board 3,000 clients, and gain additional services in HR consulting, retirement, health and welfare and compensation services. ACS said the deal will also enable it to expand ties with half of the Fortune 100. The combined business will bring together some 5,000 employees focused on HRO, with pro forma revenue of $805m, of which just $145m will come from ACS and $660m from Mellon. Of this figure, outsourcing will represent 54% of the total revenue, and the remaining 46% will come from consulting.
Included in these figures is Mellon’s consulting business, which employs some 1,000 consultants across 35 offices worldwide. And with revenue of $370m, ACS claims makes it rank as the seventh largest HR consulting operation in the US, with a market presence also in the UK and Canada. Mellon’s HRO revenue accounts for the remaining $290m, with 180 clients served from 3 locations on the east coast of the US. ACS will also take on a fourth service center however located in the Far East.
ACS claims the deal gives it the broadest scope of HRO services of all of its rivals, with services covering ITO, software transformation, consulting, employee self-service, retirement, health and welfare benefits, payroll, compensation, direct delivery of services, and for at least 5 full services HRO clients. It claims that second is Hewitt Associates, which it claims lacks the ITO capability, while third is Accenture, which it claims lacks retirement and compensation planning services.
On the conference call, ACS president and COO, Mark King, said that Mellon’s HR business acquired has failed to grow revenue in its most recent financial year. ACS also expects its revenue to be flat in the 2005/6 financial year, with the principle efforts likely being put into cost cutting. As a result, ACS will pay a significant discount to acquire the business, equivalent to just two-thirds of Mellon’s HR consulting and outsourcing business’ revenue of $660m.
According to King, Mellon’s HRO business has suffered from four key problems, which resulted in its inability to grow revenue in what is otherwise a fast growing market. He said that parent company Mellon Financial had not outsourced its own HR functions to Mellon HR: This is one of the first questions a client asks, and therefore it is a major point why it wasn’t down selected [on deals], he said. Secondly, the company did not have IT services capabilities to compete against rivals such as Accenture and IBM. Thirdly, it did not have an employee or manager self-service portal, which is increasinlgy important in HR BPO to automate processes and reduce costs. And finally, it was considered to be an expensive vendor. Quite frankly, they weren’t as competitive, he said. Therefore it was this combination of factors that drew to flat revenue.
Unsurprisingly therefore, the price being paid for Mellon’s HRO business is a significant discount to the recent mergers that have occurred in the market. In June 2004, Hewitt Associates became the leading player in the HR BPO market acquiring industry pioneer Exult for $691m. The deal valued Exult at an approximate 10% premium to its market capitalization prior to the announcement, and this was 1.3 times Exult’s trailing revenue. Most recently, EDS acquired Towers Perrin’s Administration Solutions HRO business for $420m in cash, which provides pension, health and welfare administration services. According to ACS, this valued the business at some 2 times its trailing revenue.
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In a conference call, Jeff Rich ACS’ CEO, said that the Mellon acquisition was driven by increased competition in the market since the Exult takeover by Hewitt: Before last summer we had never lost to Hewitt or Exult, he said. But in the last eight months we’ve come up against them a lot; we’ve won some and they’ve won some. The acquisition has made them stronger in the market place, so we’ve looked at what we needed, and needed to increase our consulting and thought leadership.
ComputerWire also revealed earlier this week that ACS would make a major stride into Europe in 2005, and perhaps make a play for the GM Europe HRO contract in which it currently partners with Arinso International. Rich however ruled out another major acquisition during the year: We won’t be making a another significant acquisition in the next six-12 months as we need to concentrate on the integration of our business, he said.
ACS said once given approval, the deal is expected to close by the end of the fourth quarter of its fiscal year ending June 30, 2005, and will be immediately accretive to earnings.
