August 01 2008 0comment

Possible Gevity Merger Could Herald More in Industry

By Toni Whitt
Herald Tribune

Discussions between Gevity HR Inc. and Greater Atlantic Service Co., the equity investment firm that owns San Leandro, Calif.-based TriNet Group, might signal the next big wave in the human resources industry. As the economy has spiraled and bigger companies have entered the arena of professional employer organizations, Gevity’s merger talks might herald an accelerating trend of mergers and acquisitions.As the industry has evolved, much bigger companies like ADP have added PEO services to their portfolio and companies like Gevity have struggled to keep up with their buying power and servicing abilities.

The changes are putting pressure on smaller companies and there will likely be an “uptick in acquisitions in the industry,” said Greg Slamowitz, president of the National Association of Professional Employment Organizations. “It’s not the mom-and-pop industry it was 10 years ago,” Slamowitz said Thursday. “It’s become a more serious business. “To keep up, some smaller companies have begun to seek merger partners. Among the best examples in recent years is TriNet Group, a company that has grown quickly by acquiring other players in places like Denver, Boston and Houston. General Atlantic owns a stake in TriNet, as well as 9.5 percent of Gevity’s shares. On Wednesday, the Lakewood Ranch-based company announced that it had agreed to a confidentiality agreement with General Atlantic to provide non-public information and to “evaluate a possible strategic transaction.” That has prompted increased speculation that TriNet may seek to grow even larger by acquiring Gevity.

Investors appeared to warm to the idea on Thursday, boosting Gevity’s shares, which trade on the Nasdaq, by nearly 7 percent to $7.45 by the close of trading. “Our board of directors regularly considers ways to maximize shareholder values,” said Gevity spokesman Patrick Lee. “They perceive this as one of those potential methods.” While Lee declined to provide more details, he acknowledged that the PEO industry is primed for change. “It’s a very fragmented industry,” he said. “We have a handful of larger PEOs in the market, but beyond that group of five or so, you have quite a few smaller regional and local players.” While “the industry has been slow to consolidate,” there can be advantages of scale in mergers that could allow the companies to offer better service and better pricing to their customers — mostly small businesses looking to save money, Lee said.

In general, PEOs provide payroll administration, workers’ compensation insurance and benefits administration to clients and their employees. While Gevity has seen a small increase in clients’ employees during the last year, TriNet has seen explosive growth. The California company grew its so-called “work-site employees” by more than 30 percent in the first six months of this year, said Burton M. Goldfield, TriNet’s president and chief executive. “What’s so amazing is that even in spite of the economy, we’re seeing a net growth,” Goldfield said, adding that his company has been strategically acquiring PEOs to help strengthen its position in the industry. “There is significant benefit to the economies of scale if it’s done right.” By targeting the companies with strong infrastructure, management and business practices, an acquisition or merger can offer businesses a “higher level of service that they’ve gotten in the past,” he said.

The PEO business is doing very well despite the economic downturn. On Thursday, for example, ADP announced its PEO revenues rose 16.5 percent for the most recent quarter and 20 percent for the year, said Slamowitz, the industry spokesman and also a co-founder of Ambrose Employer Group LLC, a New York-based PEO. Private equity firms have become interested in the industry just as many small businesses are turning to PEOs to help them become more competitive, Slamowitz said. “General Atlantic’s 9.5 percent interest in Gevity and subsequent discussion is indicative of what we’ve all been seeing,” he said. “We’ve all been taking calls.”