Hewitt,HRO,Lead,Exult,Acquisition

Hewitt Takes HRO Lead with Exult Acquisition

22 Jun 2004 | (News)

Human resources consultant Hewitt Associates Inc is taking the lead in the nascent human resources outsourcing sector with the acquisition of Exult Inc.

Under terms of the deal, Lincolnshire, Illinois-based Hewitt will pay $6.30 per share for all the outstanding stock in Irvine, California-based Exult, valuing the company at $691m. The deal values Exult at an approximate 10% premium to its market capitalization of $616m prior to the announcement on Wednesday 16. Hewitt expects to make savings of $25m in 2005 and then $30m annually by 2006.

The takeover is a significant move in the rapidly evolving HR BPO sector. Founded in 1998, Exult is the pioneer of the HR BPO market, and has secured major deals with Fortune 500 names such as BP, Bank of America, Prudential Financial, International Paper, BMO Financial, Vivendi, Universal Music, and Circuit City. The deal is something of a coup for Hewitt, which will establish itself at the forefront of the HRO market, that is rapidly being usurped by traditional IT services giants such as IBM Global Services, Accenture, Affiliated Computer Services, and EDS.

The merged business will have an existing base of clients serving some 600,000 employees from 21 companies in HRO, and in total 18 million people across 300 companies in the area of benefits outsourcing. Hewitt's skills in HR consulting will also give the combined business a further 2,300 clients.

Hewitt expects total revenue to increase by approximately 35% in 2005 to $3bn, and revenue from outsourcing to jump 50%. However, excluding Exult, Hewitt expects revenue in 2004 to grow between 10% and 11% to between $2.2bn and $2.22bn, of which it expects to see 10% to 12% growth in outsourcing to between $1.32bn and $1.34bn, and 4% to 8% growth in consulting to between $763m and $793m. Exult expects revenue in 2004 to grow to between $575m and $600m, an increase of between 20% and 25% on 2003, and earnings of between $0.30 and $0.33 per share.

Following closure of the deal, Steve Denning, managing partner at General Atlantic Partners, which held a 44% stake in Exult at the end of March 2004, will join Hewitt's board. Exult's president and COO Kevin Campbell, will be responsible for Hewitt's HR BPO services, and Exult CEO Jim Madden is taking responsibility for "integration and transition" according to Hewitt.

Madden told ComputerWire that he had personally decided not to take up a position on the Hewitt board. "As to the board, we are putting two current Exult board members on the combined company's board, and from my perspective, having one of them be me did not seem to make sense as we'd prefer to have the board be as independent as we can make it," he said.

Exult's reliance on a small number of key accounts looks to have been a key factor in precipitating the sale. In April 2004, Exult suffered the high-profile loss of part of its flagship contract with Bank of America to rival Fidelity Investments in April. Fidelity took over the management of HR, payroll, and benefits programs for about 250,000 Bank of America employees and retirees over the next seven years.

The loss dealt Exult a body blow. It said that billings would fall $25m in 2005, and up to $75m by 2006 as a result, and Exult's share price slumped 22% in the space of one day.

Another major factor is the emergence of global IT services giants in the HRO space. In recent months, IBM Global Services, Accenture, ACS and EDS have won significant HRO deals, targeting the same potential client list as Exult. In January for example, IBM GS won its first in the sector in January 2004, a $400m 10-year global agreement with Proctor & Gamble that will see IBM GS support nearly 98,000 P&G employees in close to 80 countries, provide payroll processing, benefits administration, compensation planning, expatriate and relocation services, travel and expense management, and HR data management.

HRO is one of the fastest growing sectors within business process outsourcing. According to IDC, the HRO market was worth some $40bn in 2003, and is expected to grow at a compound annual growth rate of 10.9% until 2008. However, the market remains in its infancy, and there are opportunities for many of the start-ups like Exult to be bought out as the industry matures.

Investors reacted against the move, and both Exult's and Hewitt's shares dropped 7% and 14% respectively following the announcement, although they have regained ground since. Investors will no doubt be aggrieved that that they have seen Exult's share value decline 45% since last July, when the company would have had a market capitalization of $1.15bn.

Related Content: