ASF Administaff, Inc.

New York-based outsourcing service provider Paychex Inc. (PAYX) recently completed the acquisition of recordkeeping and administrative solutions provider, ePlan Services. Financial details of the transaction were not divulged. Post acquisition, ePlan Services will operate as a wholly owned subsidiary of Paychex and all the employees will be retained.

Denver-based ePlan Services serves the financial advisory market with its software tools that automate the administration of 401(k) plans (a retirement plan under which both employees and employers can contribute). The tool also provides greater transparency to the fee structures for services, through a fee disclosure option built into the tool. Currently, the company serves roughly 4000 retirement plans.

ePlan Services’ Web-based platform will complement Paychex’ existing recordkeeping business. With years of experience, Paychex was acknowledged as the leading recordkeeper in the U.S. by PLANSPONSOR magazine.

With ePlan Services’ under its wing, Paychex will be able to serve financial advisers with clarity into fee structures as the market transitions to full disclosure models to keep pace with consumer and legislative demand.

We find enhanced financial advisory services encouraging as these are likely to attract more clients, and in turn drive revenue growth in Paychex’ HR Solutions segment.

Apart from this, Paychex also solidified its Payroll Services segment with the acquisition of the online payroll solutions provider, SurePayroll Inc. in December 2010. The deal cost the company $115.0 million in cash.

SurePayroll’s user-friendly online payroll solutions are specifically targeted at small businesses. It serves about 30,000 small businesses with its online software-as-a-service (SaaS) payroll product.

Apart from this, SurePayroll shares channel partnerships with renowned financial institutions, such as Citibank (C), Harris Bank and SunTrust Banks Inc. (STI), which forward the company's offerings to their respective small business customers through private-label and referrals.

Small businesses are significant revenue sources for Paychex. With the SurePayroll acquisition, Paychex will be able to offer SaaS-based solutions, for payroll processing through a user’s Web-browser or an iPhone application.

We believe that the successful integration of these two acquisitions will boost Paychex’ revenue streams and also increase its market share, going forward. We also remain encouraged with its better-than-expected top and bottom lines in the third quarter. Though guidance for the fourth quarter was weak, we believe that cost control measures and anticipated higher contributions from small businesses could provide some cushion.

However, we remain concerned about growing competition in the outsourcing space from big players such as Automated Data Processing Inc. (ADP) and Administaff Inc. (ASF).

Currently, Paychex has a Zacks #3 Rank, which translates into a short-term Hold recommendation.

 
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