Automatic Data Processing Inc.'s (ADP) planned $500 million takeout of ProBusiness Services Inc. could stumble because of antitrust concerns. But that will depend on how regulatory agencies view the $5 billion-in-annual revenue payroll processing market, said industry sources. A week ago, Roseland, N.J.-based ADP, a $24 billion market cap payroll processing company, inked a definitive to acquire fellow payroll processor ProBusiness for $17 a share cash. The Jan. 6 announcement skyrocketed Pleasanton, Calif.-based ProBusiness's stock about 66% to $16.50. At press time, the euphoria of the news wearing off, ProBusiness stock closed down at $16.21. The company could not be reached for comment.

An antitrust lawyer familiar with the matter said, "There are serious problems," with the deal. He added that roughly 60% of ProBusiness's revenue comes from taking ADP clients, making them direct competitors.

"I think there's a good chance a second request will be issued," said the lawyer, who requested anonymity.

One arb tracking the situation said he was worried about the overlap between the two companies' outsourcing business. ADP would own a 50% market share thanks to ProBusiness, he contended.

However, Charles Trafton, an equity analyst with Adams, Harkness & Hill, argued that the combined company would not have that much outsourcing market share.

He said ADP, Ceridian and ProBusiness focus on businesses with a large number of employees, and the idea of the biggest player buying the third largest could cause concern to the Department of Justice or the Federal Trade Commission.

An ADP spokeswoman described the company as the biggest player in the space but did not give a breakdown on its market share. She said the company plans to file for Hart-Scott Rodino approval this week. She acknowledged that she did not foresee any snags to the deal going through, but said nothing was sure until the filing went through. The spokeswoman added that ADP did not have a time frame on the deal.

Meanwhile, the chief financial officer of one major industry player expected the planned transaction would not meet antitrust difficulties.

John Morphy, the CFO of $11 billion market cap payroll processor Paychex Corp., said, "My opinion is that they will get [the deal through], given how small ProBusiness is." Indeed, ProBusiness generates about $175 million in annual revenue, compared to the $1.5 billion in annual sales of ADP, and the $1.2 billion of sales for Ceridian Corp. Rochester, N.Y.-based Paychex focuses on companies that have a small number of employees, but does work with firms that have as many as 2000 employees.

ADP, Ceridian and ProBusiness look at companies with a large number of employees, at least 500 and up, said Morphy. "If [a regulatory agency] looks at the payroll business as a whole, they will not have any problems with the deal," he said, because they are so many payroll processing companies. And even if they segment the industry, "more questions will be asked," but ADP should still get the deal through, he predicted.

Morphy quipped, however, "I'm no Hart-Scott-Rodino expert."

Todd Reimringer, senior VP of, Minneapolis-based Ceridian's payroll division, did not return a call seeking comment. Gary Nelson, general counsel for Ceridian, said the firm did not have an opinion on the transaction.

"If it goes through, we will deal with it," Nelson said.

Trafton pointed to an influx of companies entering the payroll processing space, including PeopleSoft Inc., which provides software that allows large companies to handle their payroll processing duties. Antitrust agencies could view PeopleSoft as a competitor, said Trafton.

ADP has retained Paul, Weiss, Rifkind Wharton & Garrison as the firm's outside antitrust counsel. Richard Borisoff, the partner working on the situation, did not return a call seeking comment before press time.

Michael Baker, an analyst with Raymond James & Associates, said, "it was too early to tell" if overlap problems could hobble the deal.

Baker said if the DOJ or FTC looks at the ADP/ProBusiness transaction from a global perspective, mostly likely, "there will not be a problem with the deal."

But there are so many ways to slice and dice the payroll processing market, it is too difficult to tell, he acknowledged.