Paychex (PAYX, Financial) is reportedly in talks to acquire its smaller competitor, Paycor (PYCR, Financial). Although financial specifics remain undisclosed, PYCR shares surged to their highest since October 2023, valuing the company at over $4 billion. PAYX shares dipped slightly on the news, but acquiring PYCR at this valuation would mean PAYX pays about 5.5 times projected FY24 sales. The uncertainty around the deal details may be causing some profit-taking in PAYX, especially after a 20% increase since July 2024 lows.

• The potential acquisition aligns well for both companies. PYCR is experiencing growth at four times the rate of PAYX, which has seen mid-single-digit revenue growth in recent years. PYCR's success is driven by its innovative platform that attracts customers from legacy technologies, including those from Automatic Data (ADP, Financial).
• PYCR targets the mid-market, which constitutes about 50% of the HCM market. Acquiring PYCR would significantly advance PAYX's goal to strengthen its middle-market HCM business. In Q2, the mid-market was a key growth area for PAYX as businesses showed optimism for 2025, with hiring intentions reaching their highest since late 2023.
• PAYX recently noted its M&A pipeline is the largest in years, as companies reassess value, leading to more potential deals. PAYX is focused on expanding scale in new or existing markets, particularly the mid-market, and is seeking growth platforms adjacent to its current offerings, making PYCR an ideal candidate.
• Industry consolidation is likely as competitors reach similar capabilities in the HCM suite. Consolidating this fragmented sector benefits customers by reducing the need to switch vendors for better prices or tools. PAYX has emphasized the growing client interest in long-term relationships with HCM partners in past earnings calls.

As a competitor in HR and payroll services, PYCR complements PAYX's business and clientele well. With U.S. employment remaining resilient despite economic challenges, PAYX's acquisition of PYCR could be timely, setting the stage for a hiring rebound.