One thing about Wall Street, it has no problem expressing displeasure. Yesterday, Hewitt Associates (NYSE: HEW ) announced it was purchasingExult (Nasdaq: EXLT ) in a stock-for-stock deal. Wall Street instantly demonstrated its opinion, as Hewitt's stock fell 13% and Exult's dropped 6%.
Hewitt is a global leader in human resources outsourcing and consulting. Exult is also in the industry, but as a smaller player. In fact, the deal allows Hewitt to become a one-stop shop for HR: benefits, payroll, HR information systems, recruiting, and learning. Moreover, the deal is expected to increase revenues to $3 billion in fiscal 2005.
The HR outsourcing space is ripe for consolidation, and Exult has made a variety of acquisitions of its own, such as its $23 million cash purchase of ReloAction. The deal expanded Exult's service offerings, as well as its customer base.
No doubt, there is a trend for major companies to outsource HR. After all, why waste time and money on a non-core function? However, the competition for HR outsourcing contracts is stiff and the sales cycle is long. This was the case, for instance, with Exult's win of Air Canada as a client.
Moreover, HR outsourcing contracts are complex and long-term. This makes revenue quite volatile. When Bank of America (NYSE: BAC ) awarded part of its contract to an Exult competitor, there was a hit to revenues.
True, as is typical, Wall Street had a short-term reaction, as the deal is somewhat dilutive and the combination will involve complex integration. However, the transaction will result in an HR outsourcing powerhouse that will serve more than 18 million participants from more than 300 companies. And it will make it much easier to deal with the competitive landscape, with firms like Administaff (NYSE: ASF ) , Automatic Data Processing (NYSE: ADP ) , and Accenture (NYSE: ACN ) .
Fool contributor Tom Taulli is the author of The EDGAR Online Guide to Decoding Financial Statements. He does not own shares in any stocks mentioned.