HR software company Workstream has landed a merger partner, but has lost a highly touted board member.

On Wednesday, February 13, Workstream said it signed an agreement to merge with the operating holding company of Empagio, which owns the venerable payroll application Tesseract.

But on February 9, prominent Stanford University business professor Jeffrey Pfeffer resigned from Workstream’s board of directors, according to a public filing with the U.S. Securities and Exchange Commission. Pfeffer’s tenure was brief: Workstream announced his appointment to the board on January 4.

Pfeffer didn’t immediately return a call seeking comment.

Gary Damiano, Workstream’s senior vice president of marketing, said the merger factored into Pfeffer’s resignation. Pfeffer faced playing a more limited role than he was expecting, Damiano said. “We’re disappointed,” he said.

On the other hand, Workstream is pleased with the merger agreement it has signed with Empagio.

“The combination of Workstream with Empagio catapults our company to one of the top three human capital management (HCM) providers overnight, and accelerates our transformation as we immediately become the only HCM company with a payroll services capability across North America,” Workstream executive chairman Michael Mullarkey said in a statement.

The combined company will serve more than 600 Fortune 2,000 firms, including such big names as Wells Fargo, Miller Brewing and United Airlines, according to a statement from Workstream and Empagio.

Under the terms of the deal, Empagio will own 75 percent of the combined entity, while Workstream will own 25 percent. Empagio CEO Seth Bernstein will become a 60 percent majority shareholder of the company. Bernstein also is slated to become CEO of the combined company.

The deal is subject to closing conditions, including governmental approvals. It is expected to close during the second half of 2008.

Workstream is one of many players in the hot talent management software market. That market refers to applications for key HR tasks such as recruiting and performance management. Talent management applications are among the fastest-growing products within the HR software arena, which is itself the fastest-growing category of business software.

Damiano portrayed the combination of Workstream and Empagio as a good fit, in that Empagio focuses on more transactional tasks such as payroll and time and attendance while Workstream’s applications are for more strategic functions such as performance and compensation management.

News of the agreement ends weeks of speculation in the HR technology arena. Workstream first announced in late December that it he had received an “an unsolicited offer from a U.S.-based payroll business to determine the viability of a merger.”

Other companies suspected of being the suitor included ADP and Paychex.

Lisa Rowan, an analyst with research firm IDC, said the deal should calm customer worries that Workstream isn’t a viable vendor.

“It shores them up financially,” she says.

Workstream reported net income of $782,411 for the three months ended November 30. But for the six months ended November 30, it posted a net loss of $4.7 million. Workstream also laid off about 15 percent of its workers in recent weeks, Damiano said. Workstream’s headcount is now about 200 employees, he said.

—Ed Frauenheim