Hewitt Associates Inc.'s deal Wednesday to buy Exult Inc. would enlarge the largest global human resources outsourcing firm and may unsettle banks and other financial services companies that are trying to establish themselves in the business.
The boards of directors of Hewitt, a Lincolnshire, Ill., outsourcing and consulting firm, and Exult, an Irvine, Calif., provider of human resources business process outsourcing, approved a definitive agreement valued at $691 million for Hewitt to buy Exult.
Dale Gifford, Hewitt's chairman and chief executive officer, said in an interview that when the deal closes his company will strengthen its position as the global leader in human resources process outsourcing. The post-merger company would have estimated fiscal 2005 revenue of $3 billion.
"With the expectation that we, and almost every industry analyst and competitor, have about this as a large growth area, we wanted to strengthen our position in the marketplace and establish ourselves as the leader," he said.
Gartner Inc., a Stamford, Conn., research and advisory firm, reported in January that employee benefit outsourcing was a $29.8 billion industry in the United States. It predicted the industry would grow to $34.8 billion by 2006.
Before the deal, Hewitt expected its net revenues to rise by 10% to 11% this fiscal year, from 2003's $2 billion. For fiscal 2005, before the acquisition, Hewitt had expected net revenue growth of 6% to 9%. The addition of Exult is expected to help revenue rise 35% by then.
Mr. Gifford said that when the deal closes in September Hewitt would be the only company able to integrate a full spectrum of human resources services - benefits, payroll, HR information systems, recruiting, and learning.
Jim Madden, Exult's founder and chief executive officer, said the deal makes Hewitt the "unquestionable" leader in a market that is becoming crowded.
Roughly a dozen companies are "true" competitors for the human resources outsourcing business of Fortune 500 companies, Mr. Madden said. Fidelity Investments, Mellon Financial Corp.'s Mellon HR, and CitiStreet, a joint venture between State Street Corp. and Citigroup Inc., are all trying to gain market share, but he said they have not yet accumulated enough assets.
"You have seen and heard about Mellon and CitiStreet," he said, "and financial institutions and banks have an interest in this space, but I would not consider them our fiercest competitors. I think this is a relatively new business for them, and since it is away from their core business it may take time."
Mr. Gifford said some financial services companies are competitors but some also could become customers. Hewitt has developed a lot of relationships with banks as clients, he said, and Mr. Madden said Exult has relationships with several large banking companies, including Bank of America Corp. and Bank of Montreal.
After Bank of America completed its purchase of FleetBoston, Fidelity Investments announced that it had been hired to take over payroll and benefits services from Exult. Mr. Madden said the transfer of this business would take several years.
"There are some players out there, whether it is Fidelity or Mellon or CitiStreet, but there is an overwhelming number of financial services firms that want to focus on their core activities and outsource everything else," Mr. Gifford said.
Burton Greenwald, an analyst in Philadelphia, said financial services companies would have to get bigger or get out of human resources outsourcing. "This is a business where scale is critically important," he said. "Unless you have a range of services and technology, you are not going to be a player in outsourcing."
Mr. Greenwald said Fortune 500 companies would outsource to the largest companies and boutique firms would be phased out, acquired, or limited to business from smaller companies. "This isn't necessarily a profitable business on the lower end," he noted.
