Automatic Data Processing, Inc. - Company Profile, Information, Business Description, History, Background Information on Automatic Data Processing, Inc.

One ADP Boulevard
Roseland, New Jersey 07068-1728

History of Automatic Data Processing, Inc.

The undisputed number one paymaster to the nation, Automatic Data Processing, Inc. prepares the paychecks for one out of seven American workers. The company, widely known as ADP, is also a leading supplier of stock quotation systems, handles the back-office processing for many securities brokers, and provides a variety of computerized services to auto dealers as well as claims service support for auto insurers and repairers.

The multibillion dollar operation owes its start to the fact that when the bright and innovative Henry Taub graduated from New York University in 1947, he was still shy of his 20th birthday, and thus more than a year away from eligibility for the CPA exam. Consequently, Taub, who had worked part-time for a small Manhattan public accounting firm while a commuter student at NYU, became a full-time employee. The work entailed keeping the books for dozens of small businesses, coupled with lots of handholding.

Taub soon became aware that preparing payrolls and maintaining the necessary supporting data were a major headache for smaller employers. Social security was as yet less than a dozen years old, and income tax withholding had only started during World War II. All in all, payroll accounting was becoming steadily more demanding.

So, in 1949, with the support of two business acquaintances, Taub opened a company to provide that specialized service. He called his new business Automatic Payrolls, Inc. As he readily recalled later, the "Automatic" defined the service only from the point of view of the client, who was spared many burdensome tasks; on the company's side, automation started with little more than an adding machine. Taub also noted the deeper significance of the carefully chosen name. In his hometown of Paterson, New Jersey, an old-line textile center where the automation of looms had long been a major issue, "automatic" carried the connotation of "an advanced form of work."

From a small office in Paterson, Taub solicited accounts in the surrounding area, often utilizing public transportation to pick up time sheets and return the finished payroll. During this time, Taub's company didn't handle the clients' money; signing the checks or placing cash in the pay envelopes was left for the employer to do on site. In 1951, Taub's younger brother Joe joined the organization, specializing in administrative functions for the next 25 years.

In 1953 the third member of Automatic Payroll's long-time guiding trio came aboard. He was Frank R. Lautenberg, the son of a Paterson textile worker. Three years older than Henry, Lautenberg served in Europe during World War II then earned an economics degree at Columbia University and became a sales trainee for Prudential Insurance. The local Prudential office was in the same Paterson building as Automatic, and he and the Taubs met occasionally at a nearby coffee counter. Since most of Lautenberg's life insurance sales calls took place in the evening, he found time to solicit business for Automatic during the day, and after a while joined the company full-time.

Henry Taub recollected: "We formed an effective trio, with complementary strengths--me in accounting, Joe in organization, and Frank in marketing--and very compatible in personality and business style." Eventually, Lautenberg succeeded Henry Taub as chief executive in 1975 and held that job until his election as U.S. senator from New Jersey in 1982. Henry Taub then became the company's honorary chairperson while remaining an active director and chairing the executive committee.

The young company kept adding customers in northern New Jersey and the New York City area, but progress was moderate. By the June 1957 fiscal year, operating revenues had grown to $150,000; profits for the entire year, however, were a mere $964. One factor was the switch that year from manual bookkeeping machines to an early IBM computer. Lautenberg later told Investor's Reader magazine that the punch card computer system "damned near killed us. It wasn't a very good improvement. Then we started developing techniques that enabled us to start working with computers."

With the new equipment, Automatic Payrolls also branched into some general data processing services such as analytical reports covering sales, costs and inventories, questionnaire tabulation, and even the maintenance of bowling league statistics. In 1959 the Taubs set up a separate company, Automatic Tabulating Services, to handle the general data processing business. Then, in June 1961, in preparation for going public, the payroll and tabulating companies were merged into the newly named Automatic Data Processing. At the time, ADP had about 200 payroll clients, including the cast and crew of the Broadway hit My Fair Lady and 30 general processing customers.

With only a modest $419,000 in revenues and $25,000 in net profits for the June 1961 year, ADP was very much of a "penny stock" when the first 100,000 shares were offered to the public in September 1961 at $3 a share. Henry Taub reflected: "Those first dozen years were our incubation period. We learned how to operate what was essentially a brand-new business." When it emerged from the incubator, ADP was set to mature. Starting with its first quarter as a public company, ADP managed an unbroken string of double-digit earnings per share growth--a string that encompassed 128 quarters as of the end of the 1993 fiscal year. Meantime, each share bought for $3 in 1961 had multiplied into 144 shares worth more than $7,000 by 1993.

Just prior to offering its stock on Wall Street, ADP went to Wall Street to drum up business. Encouraged by a couple of brokerage houses that were already payroll clients, ADP opened an office in downtown Manhattan in July 1961 to process "back office" data such as customer trade confirmations and related reports--the start of what was to become ADP's second most important line.

Buoyed by strong internal growth after going public, ADP was ready to speed its development through aggressive use of acquisitions by the mid-1960s. Since then, it acquired more than 100 companies or corporate units. However, management stressed that these acquisitions should serve as "catalysts" and not as "our main engine of growth." As Josh S. Weston, who joined the company in 1970 and became CEO in 1982, explained to security analysts, acquisitions were intended "to telescope time and risk in helping us pursue a strategic direction that we wanted to pursue anyway."

The acquisition drive got under way in 1965 when ADP broadened its brokerage business with the addition of Brokerage Processing Center and shortly thereafter expanded its payroll service with Payrolls for Industry of Long Island. Then, in 1967, Miami Beach-based Computer Services of Florida was purchased. This represented a significant geographic breakout, since ADP had effectively been limited to customers that could be served by its local pickup and delivery facilities, except for a handful of payroll clients whose requirements permitted mail communication (computer transmission of payroll data and checks was not yet possible). The Florida beachhead was followed by a flurry of other east coast acquisitions. Thereafter, the company acquired or established its way into other parts of the nation. By 1972 it operated centers in 20 cities from which it paid over one million people.

That year ADP acquired CSI Computer Systems of Cincinnati, which helped about 500 car dealers with their paper work. This led ADP into its third major line, which it called Dealer Services. Since then ADP vastly expanded both the concept and scope of these services. By 1993 it served more than 7,000 North American car and truck dealers, while 1,000 European dealers were added with the 1992 acquisition of Germany's Autonom Computer. While Autonom served primarily German GM/Opel dealers, ADP planned to add more European cars and countries.

In North America, ADP clients represented roughly one-third of all dealerships while accounting for over half of vehicle sales. Many used ADP-supplied computers and programs that eliminated preprinted forms--after blank sheets were inserted into the printer and pertinent data was entered, completed invoices emerged. Other programs handled scheduling for the repair shop or kept track of all data on showroom visitors (including their preferences and dislikes) to give sales staff a better shot at closing a deal. Some of the software used to show potential financing and insurance costs came under FTC attack in 1991 for allegedly making financing the car through the dealer seem cheaper than paying cash; ADP, while insisting that the pro-financing claims were "standard industry practice," agreed to remove the challenged segment. All in all, even though, as chairperson Weston quipped to stockholders in 1992, the U.S. auto industry nowadays "seldom has one good year in a row," ADP steadily increased its dealer business, which accounted for roughly 12 percent of total ADP revenues.

With the acquisition of Itel Corp.'s Autadex division in 1980, ADP began developing another auto-related business line, now known as Automotive Claims Services. Through a huge data base maintained in Ann Arbor, Michigan, that cataloged the components of virtually every model produced since 1970, adjusters and repair shop operators could instantly obtain detailed repair estimates, including parts and labor. In 1985 ADP added a Vehicle Valuation Service for cars that were stolen or "totaled." It also started a parts service showing price and availability of private brand and salvage yard parts. Moreover, in 1993, ADP undertook a minority investment in National BioSystems, which evaluated medical costs of accident victims.

Claims Service, whose clients included most of the major insurance companies, brought in about five percent of ADP revenues in the early 1990s. Since that time, it received less emphasis. In 1993, the "Other" group, which, along with Claims, counts such minor activities as network, general accounting, and wholesale distribution, as well as overseas payroll services (mostly Britain and the Benelux countries), registered six percent of revenues as opposed to nine percent in fiscal 1992. However, the "Other" contribution may have been somewhat understated because this category was also the place for certain corporate accounting adjustments.

Strongest growth in the early 1990s was in Brokerage Services, which produced 23 percent of fiscal 1993 revenues. ADP processed over one-fifth of the trades executed on Wall Street each day. Nevertheless, these back-office functions were eclipsed by ADP's presence in the front office. In 1983 ADP bought GTE's Telenet Information Services, which put it into stock quote machines, and three years later it acquired the Bunker Ramo quote machine operations. ADP was therefore in the forefront of the industry revolution that replaced "dumb terminals" with intelligent work stations that provided each individual broker not only with current stock quotations and market news but instant access to client account records, background data, and analysts' opinions on securities, as well as offering the capability to enter orders electronically. By 1991 ADP was the top provider of such information services. Some infringement disputes with previous industry leader Quotron (which became a Citicorp subsidiary in 1986) were settled in 1993 when, as part of a deal in which ADP bought Quotron's overseas stock quotation business, ADP obtained a permanent license to certain Quotron stock information software.

ADP entered the proxy distribution business in 1989. This segment sent out stockholder reports and proxy statements to investors whose stock was held in "street name" by brokerage houses, and then processed the returned proxy votes. In 1992 ADP acquired another major proxy distribution company, Independent Election Corp. of America. However, while the ADP service was directed at individual customers of brokerage houses, Independent dealt with large institutional holders. The difference in client groups and operating systems slowed the integration of the two proxy units, and, while net results were beneficial, this generated some embarrassing problems during the 1993 proxy season. ADP remained confident, however, that the glitches would be overcome, and the company was set for a smooth 1994 season.

By far the largest ADP business, with 59 percent of total revenues in 1993, remained what is now called Employer Services. The broadened title reflected the fact that, beyond payroll-related work, this sector offered such services as job costing, labor distribution analysis, management reporting, unemployment compensation management, human resources information, and personnel benefit services. In 1993, the core of this operation paid more than 16 million employees of some 275,000 employers and prepared all the related W-2 forms and other required reports, as well as all sorts of internal personnel reports for the employer. More than 75 percent of the payroll clients also used ADP's tax filing service (started in 1982) in which ADP handled the actual submission of tax payments to all levels of government. During this time, over 95,000 clients submitted their payroll by computer. ADP was also able to arrange the laser printing of paychecks on site, while an increasing number of payments were electronically deposited directly to the employee's designated bank account.

While traditional banking institutions were a major competitor for payroll services, ADP gradually acquired such payroll businesses, often arranging for the bank to remain the up-front marketing agent while ADP operated the service. The largest such acquisition (indeed, ADP's largest single acquisition ever) was the takeover of Bank of America's 17,000-client, $110 million revenue payroll business in May 1992. Interestingly, this deal was concluded just one month after Bank of America completed the merger of Security Pacific, another California banking giant whose payroll business had been acquired by ADP eight years earlier.

While ADP started out "helping those who couldn't help themselves" when it came to payroll automation, and it continued to derive about half its payroll revenues from firms with under 100 employees, large "national accounts" with over 1,000 employees were increasingly shifting to ADP from in-house installations. Here ADP benefitted from the almost universal belt-tightening mode at most major corporations, which became willing to outsource nonstrategic functions. Furthermore, the constant growth and change in regulations on both the federal and local level required unending adjustment in payroll software programs, and many companies found it easier to leave the adjusting to a specialist like ADP. The same logic applied in adjusting a program to fit all the many jurisdictions in which a national company retained employees. Furthermore, ADP offered great flexibility. For instance, it could take in ready stride the requirements of clients like H&R Block, whose payroll, depending on the time of the tax year, fluctuated from 2,000 to 65,000 employees.

For all its business lines ADP set certain criteria. In order to realize economies of scale, the company preferred computing services that could be mass marketed and mass produced. ADP stipulated that its services should induce long-term client relationships with repetitive revenues, and should require enough specialization and know-how to raise barriers to entry by competitors and exit by clients.

Josh Weston also looked for what he called "a silent third force"--a set of conditions that provided a relatively uniform framework within which ADP could design its products. Thus, the IRS and the wage and hour laws set an overall pattern for wage payments, the SEC and the stock exchanges regulated the handling of securities transactions, and the auto manufacturers informed franchised dealers how to keep their records.

ADP also maintained, "it is a prime criterion for us in either starting up or later staying in a business that we think we have an excellent chance to be number one in that particular business." In September 1993 Weston told security analysts that ADP was assessing potential opportunities in four new data service markets, any one of which, if entry through a suitable acquisition could be arranged, might develop into a fourth major ADP line. The company's presumed target would be volume in the $200 million-plus range, or more than double the Claims Service peak.

Since the mid-1980s, ADP also actively engaged in "pruning," which it defined as having "sold, shrunken, or milked" various product lines or businesses that no longer, according to Weston, "fit our long-term strategic objectives." Among others, ADP sold a computerized tax processing business, its electronic funds transfer operation that serviced automatic teller machines, and its interest in a Brazilian payroll company. It also planned to simply shrink some businesses "where a smaller ongoing operation gives ADP a better return" than selling it, especially when a unit might continue to generate cash that could build up other operations. And while counting on outsourcing by other companies to feed its growth, ADP also used outsourcing when appropriate. Thus, in 1990 it arranged for IBM to take over the maintenance of its stock quote terminals.

Throughout its existence, ADP has used highly conservative accounting, with a strong cash position, low debt, and quick depreciation, allowing it to move into technologically advanced replacements without incurring big write-offs of the displaced equipment. This operating scheme permitted the longest string of consecutive earnings advances on the New York Stock Exchange, where the company arrived in 1970. ADP crossed the billion dollar mark in revenues in 1985 and topped $2 billion in fiscal 1993 when earnings reached a record $294 million. Dividends, while fairly conservative, were raised each year since payments started in 1974. Furthermore, the company was also convinced that room existed for further progress. In 1993, ADP noted that it still had only about a 15 percent penetration of the payroll market nationally and even in its New York-New Jersey home area only about 25 percent.

Insisting that ADP push toward continually higher goals, Weston cited the example of the pole vaulter who, even after all competitors have been eliminated, is made to try for ever higher jumps until he fails to clear the bar three times. Only after the inevitable final failure is the vaulter brought to the winner's stand. As Weston sought to inspire his company to ever greater efforts with the pole vault analogy, he concluded: "Since they're going to be recognized as winners anyway, asking them to jump an inch higher isn't dirty pool."

Principal Subsidiaries: ADP Credit Corp.; Brokerage Processing Center; Computer Services of Florida; CSI Computer Systems; Telenet Information Services; Independent Election Corp. of America.

Additional Details

Further Reference

"Automatic Data Processing Hews to Winning Formula," Wall Street Journal, December 24, 1992."Payroll Specialist" Investor's Reader, July 26, 1972."Presentation on Automatic Data Processing by Josh Weston, Chairman and CEO, to The New York Society of Security Analysts," Roseland, New Jersey: Automatic Data Processing, Inc. September 13, 1990."They Make Money Paying Us," Forbes, January 4, 1993.Weston, Josh, "Soft Stuff Matters," Financial Executive, July/August 1992.

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