Another Acquisition for ADP

Automatic Data Processing Inc. (ADP - Snapshot Report) recently announced the acquisition of privately held PhyLogic Healthcare LLC, a well known provider of revenue cycle management (RCM) and medical billing outsourcing services. However, terms of the transaction were not disclosed.

Founded in 2001, Springfield, Massachusetts-based PhyLogic provides billing and accounts receivable services to medical practitioners across the U.S. The company also provides electronic health records (EHR) and cloud-based practice management (PM) solutions. Post acquisition, PhyLogic will be integrated into ADP’s medical office software division, AdvancedMD that was acquired in early 2011.

The acquisition of PhyLogic marks an important addition to ADP’s portfolio, as it will help the company to enter the fast growing RCM market. The U.S. RCM market is expected to grow from approximately $4 billion in 2010 to more than $9 billion by 2018, driven by the upcoming medical reimbursement regulation changes, according to ST Advisors, LLC.

We believe that the PhyLogic acquisition will help ADP to seize this significant opportunity over the long term. Moreover, PhyLogic’s client base primarily consists of small- and mid-size U.S. medical practitioners, a niche market that ADP has been focusing on for some time. ADP is also expected to widen its presence in the small business services segment through this acquisition.

Our Take

ADP’s growth in recent years has been largely driven by accretive acquisitions, for which it has spent approximately $776 million in 2011 itself. If the latest acquisitions are anything to go by, then the company clearly intends to continue along the same lines in 2012.

In early January, ADP entered the lucrative Indian market with the acquisition of Ma Foi Consulting Solutions Ltd, an Indian human resource and payroll management company. The acquisition is a strategic fit for the company as it will facilitate further expansion in developing markets. Through this acquisition, ADP will gain access to the growing market of human resource business process outsourcing (HR BPO) in India.

We believe that the back-to-back acquisitions will drive top-line growth for fiscal 2012 and beyond. The acquisitions are expected to diversify ADP’s revenue base, which in turn will help the company to outperform the market, in our view.

However, increasing competition from Paychex Inc. (PAYX - Snapshot Report) and Insperity Inc. (NSP - Snapshot Report) and a gloomy macro outlook in North America and Europe are major headwinds in the near term. Additionally, higher unemployment rates and low interest rates remain concerns for the company’s payroll processing business.

We maintain our Neutral recommendation on the stock over the long term (6-12 months). Currently, ADP has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

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