Alight's Strategic Divestiture: Insight on the $1.2 Billion Payroll & Professional Services Deal

Alight Inc. divests its payroll and professional services for $1.2B to focus on its Benefits Administration technology. Alight will focus on their higher-margin tech offerings. The sale, valuing the services business at impressive multiples, underscores the growth seen across the Managed Payroll industry. Learn about HRIS implementations with OutSail.

Brett Ungashick
OutSail HRIS Advisor
April 7, 2024
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Alight Inc. divests its payroll and professional services for $1.2B to focus on its Benefits Administration technology. This strategic shift towards higher-margin tech offerings marks a pivotal point, aiming to enhance its HR tech space presence. The sale, valuing the business at impressive multiples, underscores Alight's move towards tech-centric solutions and continued partnership with the buyer for client stability.Alight Inc., a prominent player in the cloud-based human capital technology and services sector, has reached a pivotal moment in its corporate journey. In a clear move to prioritize its technology offerings, the company has decided to divest its payroll and professional services business, striking a deal worth up to $1.2 billion. This strategic decision highlights Alight's intention to focus more intently on its Benefits Administration tech platform, suggesting a dedication to evolving within the HR Tech space.

The divestiture is noteworthy for its significant valuation and the future direction it sets for Alight. The transaction values the payroll and professional services business at around 10 times its estimated 2023 adjusted EBITDA and 24 times its projected unlevered free cash flow. This impressive valuation echoes the robust health of the Managed Services business, particularly in payroll and HR outsourcing. Despite the sale, the two entities plan to maintain a close working relationship, ensuring continuity and stability for clients and the market.

Key Takeaways

  • Alight focuses on its technological edge by divesting its payroll and professional services.
  • The transaction underscores a vibrant Managed Services market with a substantial sale valuation.
  • Post-sale, Alight and the buyer will sustain a collaborative partnership, endorsing ongoing market confidence.
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Background on Alight

Alight has successfully carved out a unique niche in the competitive human capital market. This section delves into the company's distinctive market positioning and the formalities of its recent divestiture.

Alight’s Unique Positioning

Alight stands out in the industry with a dual role, challenging the Big 4 by offering extensive professional services while delivering its cutting-edge Benefits Administration technology. The company has proven its ability to innovate, effectively competing with Deloitte, EY, PwC, and KPMG in offering high-quality professional services and showcasing strong capabilities with its proprietary technology platform.

Details of the Sale

The recent divestiture represents a strategic shift for Alight, emphasizing its intention to focus on technology platforms that generally promise higher margins. The agreement entails selling its Payroll & Professional Services business to a subsidiary of H.I.G. Capital for a remarkable amount, signaling confidence in the high performance and promising future of the Managed Services sector in payroll and HR outsourcing. With a valuation around 10 times the estimated 2023 adjusted EBITDA and 24 times the estimated unlevered free cash flow, the deal highlights the robust state of Alight's 'for-sale' businesses. It confirms the company's integral position as a major player in professional services and technology-driven benefits administration. Post-divestiture, Alight and the acquiring entity will maintain a close working relationship, ensuring stability and continued service excellence for clients and the market.

Strategic Rationale Behind the Sale

Alight, Inc. has signed a definitive agreement to divest its Payroll & Professional Services business. The move exemplifies a strategic recentering of the company's focus on the higher-margin benefits administration technology sector while maintaining a relation with the spun-off entities for continued collaboration.

Focusing on Higher Margins and Multiples

Alight has been unique in its provision of both extensive professional services, often standing toe-to-toe with the Big Four accounting firms, and a proprietary Benefits Administration technology platform. By spinning off the Payroll Services business, Alight shifts its strategic emphasis toward its technology offerings. This sector is known for providing higher margins and valuation multiples, an attractive prospect for Alight's sustained growth. The financial details of this transaction underscore its significance, placing the Payroll & Professional Services business at a multiple of approximately 10 times its estimated 2023 adjusted EBITDA and 24 times its estimated unlevered free cash flow.

Learn More: Visit OutSail's HRIS Marketplace to compare every leading vendor using real-time market data

Continued Collaboration Post-Spinoff

Despite the separative nature of a business spin-off, Alight and the acquired entities will preserve a collaborative relationship post-sale, which bodes well for client continuity and service excellence. The substantial sale price, up to $1.2 billion, suggests a robustness in the Managed Services sector for payroll and HR outsourcing. Alight's continuing partnership with the spun-off business ensures a smooth transition, leveraging the strengths of each entity to their mutual benefit. This strategic maneuver not only highlights the value found in Alight’s professional services but also projects a confident step towards concentrating on their technology platform's competitive advantages.

Implications of the Divestiture

Alight's strategic decision to divest its Payroll & Professional Services business is indicative of a larger shift towards maximizing the potential of their proprietary Benefits Administration technology platform. This move is set to redefine its market stance and impact the professional services sector.

For Alight

Alight, Inc.'s divestiture reflects a strategic decision to focus on its core competencies, notably its proprietary Benefits Administration technology. Opting to lean more heavily into the technology aspect, Alight stands to benefit from higher margins and multiples. With the transaction valuing the sold business at approximately 10 times its estimated 2023 adjusted EBITDA and 24 times its estimated unlevered free cash flow, the lucrative sale underpins the company's competitive edge and the healthiness of its Managed Services in HR.

Despite the separation, Alight will continue to have a strong relationship with the professional services business. This continued partnership is expected to allow for a smooth transition and sustained client service without significant disruption. By divesting from the professional services market, Alight strategically repositions itself as a technology-first entity within the HR Outsourcing and Managed Services industry.

For the Professional Services Sector

The professional services sector, particularly in HR and payroll outsourcing, is witnessing a notable transaction with Alight's divestment. The sale's sizeable price point demonstrates the robust nature of the Managed Services business and is a testament to the sector's vitality. For competitors and industry onlookers, this valuation sets a benchmark and could prompt a recalibration of investment and focus towards technological integration within the sector.

Other firms within the professional services space, especially those competing with the Big 4 or operating in HR Outsourcing, might view this divestiture as a significant market move, potentially gauging the merit of their own service offerings versus technology solutions. This strategic pivot by Alight could be a harbinger for the professional services sector to reassess the balance between traditional services and the integration of innovative technology platforms to maintain competitiveness and meet evolving market demands.

Market Reaction and Analysis

The divestiture of Alight's Payroll & Professional Services segment to an affiliate of private equity firm H.I.G Capital at a significant valuation has prompted interest and discussions within financial and industry circles regarding its implications on the market.

Valuation Insights

This transaction pegs the Payroll & Professional Services segment with a valuation approximately 10 times its estimated 2023 adjusted EBITDA and 24 times its estimated unlevered free cash flow. This robust valuation underscores the strong performance and growth potential of the managed services sector. The impressive sale price emphasizes the health of Alight's Professional Services division, suggesting a robust demand for services in payroll and HR outsourcing.

Industry Trends

Alight's strategic move is consistent with broader trends in the HR tech and professional services industry, where there is a discernible pivot toward integrated technology solutions. By divesting their Professional Services and focusing on their Benefits Administration technology platform, Alight aligns with the desire for higher margins and business efficiencies that a tech-centric approach offers. This move also indicates a continued relationship between the two entities, exemplifying an evolving partnership model within the industry.

Op-Ed: The Future of HR Tech and Outsourcing

Alight's decision to divest its Payroll & Professional Services business reflects a strategic refocusing towards its technology platform. This move highlights a broader trend in the HR industry towards technological solutions with higher profitability potential.

OutSail’s Perspective

In the wake of Alight's divestiture, OutSail, a consultancy in the HR technology space, recognizes Alight as a unique entity with its dual prowess in competitive professional services and proprietary Benefits Administration technology. This sale of the Payroll & Professional Services to H.I.G. Capital shows Alight's intent to double down on its technology offerings, as this aspect of the business garners higher multiples and margins.

The transaction is valued at a multiple of approximately 10 times its estimated 2023 adjusted EBITDA and 24 times its estimated unlevered free cash flow, demonstrating the robust nature of the managed services market. Despite the split, the symbiotic relationship is set to persist, ensuring continued collaboration between the two entities.

Managed Services Market Outlook

Looking ahead at the managed services landscape within HR, the market presents a promising outlook. The success of Alight's divestiture at a significant valuation underscores the health of the payroll and HR outsourcing segment. Growth areas are likely to emerge around automation and integration services as organizations seek to streamline their HR functions and reduce operational complexities.

Shifts in service models may also veer towards more comprehensive, tech-driven solutions that offer not just manpower but advanced analytics and decision-making tools. In effect, managed services providers will likely transition into strategic partners offering administrative support and insights gleaned from cutting-edge HR tech evolution.

Conclusion

The culmination of Alight Inc.'s decision to divest its Payroll & Professional Services business represents a pivotal reshaping of the company's focus. By concluding a deal valued at $1.2 billion, Alight underscores the prosperity of its Managed Services within HR outsourcing and sets a new strategic trajectory toward enhancing its proprietary Benefits Administration technology platform.

In this significant transaction, Alight has not only achieved an impressive sales price but has also differentiated itself with a unique market position, paralleling the offerings of the Big 4 and pioneering in HR technology. They have demonstrated the robust health of their Managed Services through commanding sale multiples — approximately 10 times their estimated 2023 adjusted EBITDA and 24 times the estimated unlevered free cash flow.

We welcome you to engage with OutSail for deeper insights and to discuss Alight's strategic decision. How will this shift affect the future of HR technology and services globally? Share your perspective on this transformative change and contribute to the dialogue surrounding HR tech and outsourcing solutions.

FAQs
Why did Alight decide to divest its payroll and professional services business?

Alight made the decision to divest its payroll and professional services business to focus more intently on its Benefits Administration technology platform. This strategic shift aims to enhance its presence in the HR tech space and prioritize higher-margin offerings.

What is the significance of the $1.2 billion valuation of the divested business?

The $1.2 billion valuation underscores the robust health and growth potential of the managed services sector, particularly in payroll and HR outsourcing. It reflects confidence in the performance and future prospects of Alight's divested business.

How will the divestiture impact Alight's relationship with its clients?

Despite the divestiture, Alight plans to maintain a close working relationship with the buyer, ensuring continuity and stability for clients. Clients can expect ongoing support and service excellence from both entities post-sale.

What are the broader industry trends driving Alight's strategic move?

Alight's strategic move aligns with broader trends in the HR tech and professional services industry, emphasizing a shift towards integrated technology solutions. This trend reflects a desire for higher margins and business efficiencies offered by a tech-centric approach.

How does OutSail view Alight's strategic divestiture?

OutSail views Alight's divestiture as a strategic move to double down on its technology offerings, capitalizing on growth opportunities in the HR tech space. The significant valuation of the transaction underscores the health of the managed services market and signals promising growth prospects.

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Meet the Author

Brett Ungashick
OutSail HRIS Advisor
Brett Ungashick, the friendly face behind OutSail, started his career at LinkedIn, selling HR software. This experience sparked an idea, leading him to create OutSail in 2018. Based in Denver, OutSail simplifies the HR software selection process, and Brett's hands-on approach has already helped over 1,000 companies, including SalesLoft, Hudl and DoorDash. He's a go-to guy for all things HR Tech, supporting companies in every industry and across 20+ countries. When he's not demystifying HR tech, you'll find Brett enjoying a round of golf or skiing down Colorado's slopes, always happy to chat about work or play.

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