PayCycle and Intuit were made for each other. Yes, literally.

At $170 million, PayCycle’s 85,000 business customers valued at $2,000 each. Intuit to take 2-cent ding to EPS.

PayCycle founder Rene Lacerte and CEO Jim Heeger are both Intuit alumni (Lacerte’s family sold Intuit a tax app in the 1990’s), so it was just a matter of time before Intuit brought their company into the fold. The company was created to integrate seemlessly with Intuit’s QuickBooks. Now Rene is on to Bill.com, so gotta wonder when Intuit will reel that one in – and for how much. VC investors in PayCycle include August Capital, CCP Equity Partners, DCM, Irwin Ventures and Total Technology Ventures. Heeger to stay on for six month transition.

PayCycle has carved out a solid niche against an army of payroll and accounting rivals young and old, from ADP, PayChex and Ceridien, to Sage, Dynamics, NetSuite, Intacct MPay, and CompuPay — to name just a few.

Reaction from…

• Dan Druker at Intacct: Intuit/PayCycle deal is “more evidence cloud computing is transformative for the accounting profession.” via Twitter.
• Dennis Howlett: “Intuit’s swoop on Pay Cycle, an on-demand payroll provider for $170 million provides an indication of how hot the SOC market is becoming,” here.
• Greg LaFollette, via Twitter: “Is this a good thing? Hmmm?”
• Michelle Long, CPA, via Twitter: “That was a very good move by intuit. I am surprised they didn’t buy PayCycle sooner.“
• Forrester analyst R Ray Wang, as @rwang0 on Twitter: It’s a move “to consolidate the SME market.”
• Barbara Osgood, Minneapolis accountant, was still trying to decide whether the news was good or bad. “Which is it,” she Tweeted. “Intuit=Microsoft=Borg – all must be assimilated – or Yea for Paycycle -making some bucks by selling to the big boys?
• Nilofer Merchant, Silicon Valley strategist at Rubicon Consulting, figures “Intuit paid 6x earnings for Paycycle when SaaS companies are going for 2x multiples. Still a deal.”
• IT analyst Laurie McCabe in Bedford, N.H, calls it “great fit for both companies, and what online payroll needs to really take off.“
• Scott Gregory, a Cleveland QuickBooks specialist, worries, “does it wave the yellow caution flag in the minds’ of current PayCycle customers? Some businesses I know moved out of Intuit payroll products and into the PayCycle world because the PayCycle offerings were less expensive and easier to use. It will be interesting to see how this integration plays out in the weeks ahead.”
• Standard & Poors Equity Research, maintaining its “hold” rating on Intuit, said the acquisition would help boost Intuit’s online offerings and should improve Intuit’s ability to cross-sell products.
• USA Today columnist Rhonda Abrams calls the deal a “terrific fit for both companies. Like two of your good friends marrying. Good news for small business.”
• At Outright, a free (yes, free) online bookeeping service, co-founder Kevin Reeth (an Intuit alumnus)  says it’s “a good omen for makers of small business web applications and services, which could inspire more innovation and competition.”

The rest of the story via Businesswire:

Companies Joining Forces to Provide new Online Payroll Offerings to Small Businesses, Accountants and Financial Institutions

MOUNTAIN VIEW, Calif.–(BUSINESS WIRE)–Intuit Inc. (Nasdaq: INTU) has signed a definitive agreement to purchase PayCycle Inc., one of the nation’s fastest-growing online payroll services, serving more than 85,000 small businesses. The cash transaction is valued at approximately $170 million, subject to adjustment. Privately held PayCycle, based in Palo Alto, Calif., is a leader in online payroll for small businesses, accountants and financial institutions.

The acquisition will give small businesses access to one of the most innovative, easy-to-use and cost-effective online payroll solutions from one of the strongest and most trusted brands in financial management software. In addition, it will provide hundreds of thousands of accountants with the ability to easily and profitably offer services as stand-alone payroll providers for their small business customers.

Customer Value

“We’ll offer small businesses a range of low-cost, high-value alternatives to expensive payroll outsourcers and time-consuming, error-prone manual payroll methods,” said Nora Denzel, senior vice president and general manager of Intuit Employee Management Solutions. “In addition, the acquisition will enable Intuit to develop and deploy the next generation of online payroll tools more quickly.”

PayCycle chief executive Jim Heeger, a former Intuit chief financial officer, said the two companies’ strengths complement each other.

“We share a common vision: using the Internet to deliver a secure and easy-to-use payroll solution to small businesses,” said Heeger. “Like Intuit, our employees are proven innovators and industry thought-leaders who develop and deliver game-changing offerings that redefine traditional ways of doing things.”

Strategic Importance

The acquisition supports Intuit’s strategic goals in two ways.

First, it underscores the company’s connected services strategy, which is designed to give customers online access to its products and services. Today, Intuit derives more than half its total revenue from connected services offerings.

Expanding the online capability of its payroll offering advances Intuit’s move into the “software as a service” markets for small business. As a result, the company expects to accelerate the growth rate of its overall payroll business.

In addition, PayCycle’s partnerships with financial institutions are expected to extend Intuit’s ability to offer integrated payroll solutions to an even larger set of partners and deliver a simple payroll solution to a greater number of small businesses.

Terms and Conditions

The transaction is expected to close during the third quarter of calendar year 2009 and is subject to regulatory review and other customary closing conditions. Intuit expects the acquisition to reduce its GAAP earnings by approximately 2 cents per share in the fourth quarter of fiscal year 2009. Intuit does not expect the acquisition to have a material effect on fiscal year 2010 earnings. After the transaction is complete, PayCycle will become part of Intuit’s small business group. PayCycle CEO Heeger will serve as a strategic advisor to Intuit for six months to help ensure a smooth integration of the two companies.

About Intuit Inc.

Intuit Inc. is a leading provider of business and financial management solutions for small and mid-sized businesses; financial institutions, including banks and credit unions; consumers and accounting professionals. Its flagship products and services, including QuickBooks®, Quicken® and TurboTax®, simplify small business management and payroll processing, personal finance, and tax preparation and filing. ProSeries® and Lacerte® are Intuit’s leading tax preparation offerings for professional accountants. The company’s financial institutions division, anchored by Digital Insight, provides on-demand banking services to help banks and credit unions serve businesses and consumers with innovative solutions.

Founded in 1983, Intuit had annual revenue of $3.1 billion in its fiscal year 2008. The company has approximately 8,000 employees with major offices in the United States, Canada, the United Kingdom, India and other locations. More information can be found at www.intuit.com.

About PayCycle

PayCycle is America’s No. 1 online payroll service, serving more than 85,000 small businesses. PayCycle provides an easy-to-use, innovative, efficient service for small businesses, backed by outstanding customer support. PayCycle also powers payroll services for leading financial institutions including Capital One and PNC Bank, and provides client payroll services through many of the nation’s accounting professionals. The PayCycle® service integrates with leading accounting programs, such as QuickBooks®, Quicken®, Peachtree® and Microsoft® Money. PayCycle’s unique “Do-It-With-You^SM” (DIWY^SM) technology platform guides customers through the entire payroll process from paycheck to W-2 forms. PayCycle also holds PC Magazine’s highest editorial honor for small business payroll, the PC Magazine Editors’ Choice Award. Visit www.paycycle.com for a free trial of the service.

Posted on June 2, 2009