ADP just announced that it will separate itself from the ‘other’ part of its business, the less know dealer business the company has been operating and building through the decades.
ROSELAND, N.J., April 10, 2014 (GLOBE NEWSWIRE) -- ADP® (Nasdaq:ADP), a leading global provider of Human Capital Management (HCM) solutions, today announced that the company's Board of Directors has approved a plan to separate the Dealer Services business into an independent publicly traded company through a tax-free spin-off of 100% of Dealer Services to ADP shareholders.
MyPOV – The question has to be much less Why? than Why only now? ADP could have done this move many years ago. Certainly running a smaller part of a business can be a distraction for executives. But it makes it also harder to evaluate a company on the capital markets. ADP already is a ‘unique’ enterprise in the HCM space alone (see my takeaways of the ADP Meeting of the Minds conference here) – as there is no other company with a comparable portfolio. So not only enterprises shortlist HCM vendors and want to see a few comparable options, but also investors compare multiple companies before they make their investment decisions. With this move ADP becomes more a HCM company than ever before, so in my view a good move.
"Consistent with our strategy to grow our position as a global provider of HCM solutions, we have concluded that the separation of Dealer Services will allow both companies to focus on their respective industries," said Carlos Rodriguez, president and chief executive officer, ADP. "The Dealer Services business remains attractive in terms of long-term growth opportunities; however, we believe this transaction will benefit ADP's shareholders by allowing each management team to better focus on its own business and strategic opportunities. ADP's ongoing efforts and commitment will be focused on executing against our global HCM strategy. As we deliver against this commitment, our goal remains driving consistent and sustainable profitable revenue growth and return of capital to shareholders through dividends and share repurchases."
MyPOV – Rodrigues basically describes that separating the two businesses will increase shareholder value, as the expectation is that the capital markets will value both business higher in the longer term. Operationally speaking this means that the synergies between the two areas of the business are negligible. ADP now needs to address potential concerns of customers that are clients of both businesses – but that should not be a challenge of significance. But it also means that the old ADP did not want to go into potential Data-as-a-Service (DaaS) business for dealers, e.g. extending employment based credit services to dealers. On the flipside of the argument ADP can now address much broader potential client portfolio, as we know from the recent user conference briefings that ADP has substantial DaaS ambitions.
Dealer Services is a leading global provider of retail and digital marketing solutions to automotive retailers and manufacturers. The global automotive market is the strongest it has been since 2007, and the volume of U.S. vehicle sales continues its recovery to pre-crisis levels. This recovery, combined with Dealer Services' global breadth and depth of service offerings, makes it the appropriate time to establish this business as its own stand-alone public company. With revenues approaching $2 billion annually, most of which is recurring in nature, along with good profitability and strong cash flows, we expect Dealer Services will be an independent public company with solid long-term growth prospects. Steve Anenen and Al Nietzel, the current president and chief financial officer, respectively, of Dealer Services, will assume the roles of chief executive officer and chief financial officer of the new standalone company.
MyPOV – The Dealer Services division was largely setup as a company inside the company already. With almost $2 billion in revenue we see one of the larger software companies being created with the stroke of a pen. Quite a market move overall, if you consider how many software companies are chasing the first billion in revenue. Nice to start out with two.
In conjunction with the spin-off ADP expects to receive in a tax-free manner at least $700 million, which proceeds ADP plans to return to its shareholders through share repurchases after the spin-off is complete, depending on market conditions. Following the spin-off, ADP expects to maintain its current $0.48 quarterly cash dividend per share. Over the medium to long term, ADP intends to return to its pre-separation target dividend payout ratio of 55% to 60%, while keeping intact ADP's 39 year track record of annual increases in its quarterly cash dividend, subject to approval by ADP's Board of Directors. The spin-off will be completed upon receipt of all required regulatory reviews and approvals. ADP expects to complete the separation in the early part of the fourth calendar quarter of 2014. […]
MyPOV – (Not a financial analyst!) This reads – do not worry investor, you will keep getting your cash dividend, and we will use some of the proceeds to re-purchase shares. So two potential upsides for shareholders.