Adp Inc. and Cdk Global

SPIN OFF : ADP Inc. and CDK GLOBAL

About ADP

In 1949, ADP began with an idea when 21-year-old Henry Taub visited a company where a key employee had taken ill. The workers weren't paid on time and the payroll wasn't done. Henry saw opportunity where others saw a problem, and launched Automatic Payrolls, Inc, a manual payroll processing service, which is now Automatic Data Processing.

ADP is a global provider of comprehensive cloud-based Human Capital Management (HCM) solutions that unite HR, payroll, time, talent, tax and benefits administration, and a leader in business outsourcing services, analytics and compliance expertise. Since its inception, ADP has served over 620,000 customers in 125 countries and has over 57,000 associates spread across the world.

About CDK Global

On April 7, 2014, ADP announced plans to spin off its Dealer Services division as a standalone company. On August 19, 2014, ADP Dealer Services announced that the name of the new company, post-spinoff, would be CDK Global.

CDK Global is the largest global provider of integrated information technology and digital marketing solutions to the automotive retail industry. As a division of ADP and after spin-off, CDK Global has over 27000 clients spread across 100 countries.

Reasons for the spin-off

Formerly, ADP used to work as a multi-divisional enterprise with all its units such as HCM, Brokerage and dealer services as separate units under the same organization.

But later the dealer services spun-off into CDK Global for two main reasons:

1. Focus on core strengths.
2. Growing size of the sub-division.

Focusing on core strength:

ADP wanted to focus on its core strengths and offerings which are HCM (Human capital Management) solutions/services. The business model of ADP ensures and focuses on recurring revenues for the future with more than 90% client retention year after year. Its revenue is directly proportional to client retention & clients’ employee numbers which is easy to forecast.

Whereas, Brokerage and Dealer services divisions revenue is dependent on overall economy which is cyclical and hence very difficult to forecast/plan future revenues. With a history of paying dividend quarter-on-quarter with growth in dividend being directly proportional to growth in overall income quarter on quarter, having some income dependent on being cyclical, board decided that a tax-free spin-off of brokerage & dealer services will enable each division to focus on their respective businesses as well and manage their financials, growth and business plans independently. This will also enable the share prices of the separate companies to conform to their business outcomes. Also, the board felt that this will enable the shareholders to unlock values of these separate business divisions.

Tax-free spin-off gave ADP share-holders a certain number of shares in spun-off companies on the effective date. For CDK, spin-off ADP shareholder was given 1 CDK share for every 3 ADP shares owned. On effective date ADP share traded at around 75 USD or so (came down from 85 USD previous day) and CDK started with USD 32 or 33 (this was sometime in Sep 30 2014). Today ADP trades at USD 100 and CDK at USD 62.

Growing size:

By 2014, the dealer services division of ADP was contributing to 16% of revenues and has grown to one fourth of the size of its core business. Over the time, this growth led to certain challenges such as resource sharing and differences in management interests. Hence, it was deemed that the spin-off could give more financial, operational and decisive freedom for the development of the division.

Who or which department initiated it?

ADP Board of Directors along with Strategy Head & CFO deliberated and decided. Tax-Free spin-off is not new to ADP – earlier in 2006 ADP had spun off its Brokerages Division as “Broadridge Financial Solutions”.

1. Spin Off Execution

Legal Requirements

The spin-off activity mandated a lot of legal leg-work. It had to be done over 15-18 months’ timeframe. It Involved

1. Conforming to regulatory requirements
2. Valuation of division being spun-off,
3. Identifying and segregating office space, employees, separating contracts (for real estate, facilities management etc.,)
4. Getting regulatory sign-offs
5. Registering new company formations, separating/segregating employee data, benefits
6. Finding anchor investors for the spun-off company

planning for employee/IT infra/financial data separation on the date effective date.

Communication

The TOP management communicated the spin off decision to the shareholders and employees through Global Town Hall meetings. In the meeting, the mid-level management was instructed to hold local meetings with all the employees and communicate them of the spin off. The focus of the meeting was to communicate the reasons of the spin off and how the reasons impacted both the companies in a positive manner. The meetings were also a way to take feedback from the stakeholders and address their doubts and insecurities regarding the spin off decision.

Key Stakeholder of ADP & CDK Global

For an organization to be profitable and sustainable in long run, the organization needs to address its focus on  key stakeholders. It was important for the ADP to understand the effect of spin off on each of its stakeholders. The stakeholders of ADP and its dealer service unit i.e. CD can be classified into following categories

1. Clients/ Customer
2. Shareholder
3. Employees

Clients:  ADP and CDK have different set of clients. The CDK, which is dealer service business of ADP, has main client as Automobile manufactures and automotive retailer. Clients of CDK range from privately held, single sore retailers to large, publicly traded retailer groups. They have client base throughout the United States and more than 100 additional countries internationally. They served about 26,000 retail locations and most OEMS. In addition to provide solution to manufactures and retailer of light vehicle, CDK also provide solution to retailers and manufactures of Heavy trucks, construction equipment, agriculture equipment, motorcycles, boats and other marine and recreational vehicles. ADP has different client base.  ADP main clients are service clients, Retail clients, Financial and legal clients, Pharmaceutical clients, Manufacturing clients and charity and Housing clients. Since there is no overlap between the client base of ADP and CDK there is minimal effect on client’s base of two companies. Management of ADP perceived that positive impact on client base can be that clients can pursue their growth strategy considering the more autonomy and flexibility afforded to dealer service business i.e. CDK. On the flip side the negative impact that client perceive is that there will be significant management time and effort will be wasted in the spin off.