Paychex to Acquire SurePayroll - Analyst Blog - Automatic Data Processing (NASDAQ:ADP)

New York-based outsourcing service provider Paychex Inc. (PAYX) announced that it will acquire online payroll solutions provider, SurePayroll Inc. for a total consideration of $115.0 million in cash. The deal is expected to be wrapped up by the end of this month. After the acquisition, SurePayroll will operate as a wholly owned subsidiary of Paychex.

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 provide the company's offerings to their respective small business customers through private-label and referrals.

Small businesses are a significant revenue source for Paychex. With the acquisition, Paychex will be able to offer SaaS-based solutions, which should facilitate users in processing their payroll through a web-browser or through iPhone applications.

Paychex will also benefit from SurePayroll's channel partnerships, improving prospects of converting manual payroll processing firms to clients. However, Paychex does not expect the deal to be accretive to its revenue or earnings in the fiscal year ending May 31, 2011.

We remain concerned about escalating competition in the outsourcing space from big players such as Automated Data Processing Inc. (ADP) and Administaff Inc. (ASF). But we expect the SurePayroll acquisition to provide Paychex with additional small business market share and revenue growth.

Currently, Paychex has a short-term Buy recommendation, as is indicated by the Zacks #2 Rank.