Special Situation Investing

Thursday, August 10, 2006

Advanced Data Processing (ADP) spinoff

Advanced Data Processing (ADP) announced it's intention last week to spin off it's Brokerage Services and Securities Clearing companies into an independant company. It is aiming to finalize the spinoff by the end of fiscal 2007 (June 2007). According to the Motley Fool, the Brokerage Segment represent about 20% of revenue. Unfortunately the new entity will not be small enough to warrant large scale institutional selling but it is worth keeping an eye on what the new management will look like, how much skin they have in the game (shares & options) and how tightly coupled it will be to ADP.

It seems the primary motivation for the spinoff may be it's low growth relative to the rest of ADP, as described in the Red Herring:

The company has typically only seen single-digit growth in the brokerage services business and is aiming for double-digit growth in its payroll-processing and back-office businesses.

The article also describes the standard spinoff motivation of a simplifying analyisis of the parent company. This often leads to a higher price.

Mark Marcon and Jeffrey Meuler, analysts with Robert W. Baird & Co., view the spin-off as a positive move for ADP. “The unit has been a drag on ADP’s margin improvement and we believe that the concerns regarding secular trends in the division have held back ADP’s multiple,” they wrote in a research note.


  • ADP is Automatic Data Processing and not Advanced Data Processing ! :)

    By Anonymous Anonymous, at 10:52 PM  

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