Empagio, Workstream Merge; Possible Sale Before 2011?

Feb 13, 2008
This article is part of a series called News & Trends.

Workstream is being bought in a merger with Empagio, a provider of payroll and human resources software, resulting in the only human capital management provider with a payroll services capability across North America.

Under the agreement announced Wednesday, Florida-based Empagio will own 75% and Ottawa-based Workstream will own 25%.

Wednesday’s announcement also means that analyst Jason Corsello’s prediction last month was more than a hunch. He said Empagio would become Workstream’s suitor — and his prediction was based on a variety of factors.

Workstream probably went with Empagio over other vendors for a variety of reasons. For example, Ceridian seems to lack an acquisition strategy, while ADP’s technology acquisition strategy “seems to be focused on solid technology vendors leveraging a SaaS, multi-tenant environment,” notes Corsello. Other vendors, he says, like Ultimate Software and Paychex, are simply not good fits.

Before the merger announcement was made, Josh Bersin, CEO/founder of Bersin & Associates, said a Workstream acquisition points to “an inevitable trend in the small business and mid-market segments” that need such software. He says it is still too difficult for buyers to integrate their talent management software with compensation and other HRMS systems.

Corsello also notes that “Empagio, pre-merger, is valued at over $100 million — a valuation I find expensive, especially considering the fragile state of the public markets.”

And Mark Stelzner, who also put his money on Empagio before Wednesday’s announcement, called Workstream “purely additive to Empagio holdings while ensuring the cross-sell/up-sell opportunities.” Stelzner, founder of Inflexion Advisors, points out that he would be surprised “if the new Empagio/Workstream exists for more than 36 months post-merger.” He says this doesn’t mean bankruptcy, but instead that this may point to the combined entity being sold within a three-year period.

“Empagio’s holdings are largely based on annuity revenues from legacy clients of the former Tesseract platform. That being said, I believe Empagio is a profitable entity. If true, Workstream would stand to gain from the influx of maintenance revenue to offset their SG&A burn rate,” he says.

“The combined entity is relatively sizable, but now one must question ongoing the R&D investment necessary to ensure seamless integration and support,” says Stelzner.

Who is Empagio?

Seth Bernstein, chief executive officer of Empagio, says the company’s “360-degree offering is unique in the industry and will create virtually limitless opportunities to expand the way we service both current and future clients.”

The 25-year-old company provides clients with a “roadmap and platform” to develop a more strategic HR function. It says it is unique because it “provides customers the flexibility to increase the strategic nature of their HR function by implementing individual HR outsourcing components based on readiness and need.” It says clients are in control of its technology platform and self-service solutions.

Workstream, which was founded in 1996, already services customers such as Chevron, Kaiser Permanente, and Wells Fargo. Its revenues climbed 99% to $29.3 million in 2007 from $14.7 million in 2002.

The combined company will service over 600 of Fortune 2000, including American Express, Visa, United Airlines, Delta Airlines, Dow Jones, Home Depot, Honeywell, John Deere, Kraft, Miller Brewing, Nike, Sony, Target, and others.

The board of directors of both companies have approved the proposed merger, which is expected to close in the second half of 2008. Terms of the deal were not disclosed.

This article is part of a series called News & Trends.
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