Payroll processor Automatic Data Processing (NYSE:ADP) is sending a signal that it wants to be more selective in its acquisitions. We saw strong evidence last week when it purchased Employease, which develops Web-based human resources and benefits applications. The company's comprehensive offering allows clients to undertake such things as benefit-plan enrollment, employee reviews, job-applicant tracking, and leave management.
Employease has more than 1,500 customers and has key alliances with partners including Aon (NYSE:AOC), PacifiCare, and Google (NASDAQ:GOOG). Perhaps the most important alliance was the one with ADP, formed in October 2004.
Through that alliance, ADP saw how the middle market was quickly adopting on-demand software models. This approach has proved successful in customer relationship management (CRM) applications, such as those at Salesforce.com (NYSE:CRM) and RightNow (NASDAQ:RNOW). Now, it looks as though the on-demand model is moving into HR.
By centralizing information in one database, an on-demand application has key benefits. For example, there is little need for integration or complex installations because the software is accessed by a Web browser. What's more, these software users are becoming much more comfortable using a Web browser, thanks to the widescale adoption of consumer Internet applications such as eBay (NASDAQ:EBAY), Amazon.com (NASDAQ:AMZN), and Google.
Finally, the pricing of on-demand software is popular among customers. Pricing is usually done as a monthly or quarterly subscription. In the case of Employease, the cost ranges from $6 to $8 per employee per month.
In all, the purchase of Employease makes a lot of sense, and it highlights, once again, why ADP continues to be a highly successful company. Another sign of why it's doing well came along when it announced that it will spin off its Brokerage Service Group -- which accounts for 20% of revenues -- to shareholders. On the conference call announcing the move, management said ADP will still seek out acquisitions, but as we've discussed, the company will become more selective. It will avoid expanding into new categories and won't make large, dilutive transactions. This new approach should help ADP toward its long-term goal of 10%-plus revenue growth and 15%-plus growth in earnings per share.
However, none of this means the stock is a buy. As Fool colleague Ryan Fuhrmann pointed out, it's expensive right now, with its forward multiple of 20 and the industry growing at 5% per year. Yes, ADP is a great company, but don't expect it to offer great growth for shareholders.
Related links:
Amazon and eBay are Motley Fool Stock Advisor recommendations. For more of Tom and David Gardner's market-beating stock picks, try out Stock Advisor free for 30 days.
Fool contributor Tom Taulli does not own shares of companies mentioned in this article.
