HR Outsourcing Consolidation Continues with ACS-Mellon Deal

The all-cash transaction between ACS, a business process and IT outsourcer, and the Pittsburgh-based Mellon is scheduled to close by mid-year, the firms said in Web site statements. The deal has been approved by both companies’ boards.

The companies said ACS would offer jobs to “virtually all” of Mellon’s nearly 4,000 HR outsourcing and consulting employees and that the Dallas company is also buying or assuming leases on most of the facilities included in the transaction including several call centers.

“This strategic acquisition makes ACS a stronger competitor in the end-to-end HR marketplace and strengthens our position as a leading global provider of business process outsourcing services,” said Jeff Rich, ACS chief executive officer, in  the ACS statement .   “We are gaining new capabilities, adding blue chip clients and talented subject matter experts. The multi-scope HRO marketplace is one of the fastest growing markets we serve, and we are uniquely positioned with strong subject matter experts, an industry leading global production model, and world class information technology skills.”

Wednesday’s deal is merely the latest in a wave of consolidation in the HR outsourcing space.   Indeed, in the past four months, two large deals have been completed, including a $420 million purchase of a Towers Perrin consulting unit this month by Electronic Data Systems Corp. the second-largest computer-services company. In October, Hewitt Associates paid $776 million for human-resources outsourcer Exult Inc.

According to ACS and Mellon, the Mellon unit currently serves approximately 3,000 clients and provides consulting services, benefit plan administration services, and multi-scope HR outsourcing services. The consulting business is the seventh largest HR consulting practice in the US and growing capabilities in the UK and Canada. In addition, multi-scope HR outsourcing services are delivered in over 50 countries supporting multi-national clients, the companies said. After the merger is completed, officials said the combined company would have “significant relationships” with more than half of the Fortune 100 companies.

Specifically, Mellon said ACS would allow it to add services in:

• consulting
• retirement services
• health and welfare benefits administration
• compensation planning.

ACS estimated that the combined company will generate $805 million in annual revenue with 54% coming from outsourcing and 46% from consulting. Specifically, ACS said it expected to get 24% of revenue from HR multi-scope BPO outsourcing, 23% from retirement consulting, 12% from defined benefit outsourcing, 10% from defined contribution outsourcing and 10% from international consulting.

In general, ACS said said the HR consulting market is expected to enjoy an annual growth rate of 4% to $15.6 billion by 2007, Payroll/Benefits Administration an 8% growth rate to $17.2 billion by 2007 and multi-scope HR business process outsourcing 21% to $14.9 billion by 2007.

“No matter how you look at it,” said   Mark King, ACS president and chief operating officer, during a Wednesday morning conference call, “ACS will be a major force in this growing business.”

The Mellon unit, which reported revenue of $918 million last year, has been on the block since late last year and has struggled to win new deals and hold major clients. In fact,   King said that Mellon’s HR business was flat during 2004 with at least two HR clients severing their ties with Mellon because of long-standing and widespread industry speculation that it was about to exit the HR outsourcing space. King also said a pension plan covering the unit’s employees was underfunded and that ACS expected to bring it up to proper funding levels “very quickly.”

For its part, Mellon asserted that the company had determined after an internal review that it was more important to put its resources in its core business. As a part of that decision, Mellon Chairman and Chief Executive Officer Martin McGuinn said in his company's statement that Mellon was keeping its shareholder services unit, Mellon Investor Services (MIS) as part of its new Payment Solutions & Investor Services unit to be headed by Mellon vice chairman James Arammanda. McGuinn said Mellon would use the cash from the deal to expand its operations in:

• Institutional Asset Management
• Mutual Funds
• Private Wealth Management
• Asset Services
• Payment Solutions & Investor Services

McGuinn said those business lines current include more than $4 trillion under management administration, and custody.McGuinn said MIS, which currently services 300 companies and about 20 million shareholder accounts, is also closely aligned with Mellon's coreprocessing businesses of asset servicing and cash management.

"Mellon has made significant progress in repositioning the HR consulting and outsourcing businesses for improved profitability and growth. However, these businesses will benefit from ACS, an organization devoted solely to the BPO and IT services industry," asserted McGuinn. "This decision was reached after thoroughly reviewing these businesses. We then balanced those findings with the investments required to compete successfully in those businesses with the resources required to build on the strong positions of our other core businesses and achieve our long-term growth goals."

Mellon spokesman Burt Wolder said the company had invested a great deal in the HR business, but it wasn't ultimately large enough to make the HR unit's various components worthwhile from a business standpoint. "The ongoing investment needed to keep the whole thing current wasn't as fullsome as it might have been," Wolder told PLANSPONSOR.com.

ACS executives said in the conference call that Mellon was hampered in its efforts to make the unit profitable because of its high-cost structure including its operations in high-cost locations.

Additional information presented in the ACS conference call is available  here .