After a long and
sometimes fractious process, VeriFone Systems stands poised to
become the world’s largest terminal maker with its acquisition of
Hypercom. The news comes at the end of VeriFone’s most successful
year to date in which it reached $1bn in sales. Charles Davis
profiles the business.
Go deeper with GlobalData
VeriFone will acquire
Hypercom in an all-stock transaction valued at approximately $485m,
including net debt assumed by VeriFone. It represents a major
increase from the $280m hostile bid VeriFone made public in
September.
Even before the deal with
Hypercom, however, VeriFone was remaking its business, evolving the
model for what Paul Rasori, senior vice-president, global
marketing, describes as “a point of inflection” for the payments
industry.
“We knew we didn’t want to be
simply a hardware company in a business that is rapidly moving
towards mobile, non-fixed solutions,” he says. “So we have worked
to move from the fixed function terminal environment to mobile,
where we see the opportunity to reach way down into the marketplace
and enable more cost-effective payments.”
To that end, Rasori says that
VeriFone is aggressively seeking deals with online value-added
services and other players who can bring value to
merchants.
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By GlobalData
Bling Nation
deal
For example, VeriFone
announced a separate deal in September with Bling Nation, a company
that specialises in inserting m-payment tags into mobile phone
handsets.
This deal enables VeriFone to
use Bling Nation’s reseller network and payments gateway to extend
point of sale acceptance to PayPal and to use Bling Nation’s
rewards-based contactless system.
Rasori says that online firms
such as PayPal are attracted to VeriFone’s global reach.
“It’s not that hard to knock
off mag-stripe transactions, but what attracts us to PayPal and
vice versa is the global footprint,” he says.
“The EMV-compatible payment,
for example, takes us into global markets with PayPal. That’s what
they are interested in – the global market. And that’s what we can
offer our clients.”
The development of near-field
communications (NFC) means even greater opportunities for VeriFone.
The biggest development in NFC to date – the announcement that
AT&T, T-Mobile USA and Verizon Wireless are all working
together to build a mobile payments system, Isis, that will rely on
devices with NFC chips embedded – could signal a new era in mobile
payments for the US. In addition, Google CEO Eric Schmidt recently
said the next generation of Android handsets would be NFC-enabled,
and Samsung vowed to make all of its handsets NFC-embedded starting
next year.
“This is a turning point for
mobile payments,” Rasori says. “No retailer in the world is going
to install a whole new system just because there is NFC, so first
we have the opportunity to integrate. As these new services emerge,
they have to get to the merchants, so we have that opportunity
before us as well.”
Rasori likened VeriFone’s
customer-facing endpoint in the POS market to “oceanfront
property,” and says that the near-term opportunity lies in
leveraging the VeriFone-installed footprint at the point of
sale.
Under the terms of the
Hypercom transaction, which has been unanimously approved by the
boards of both companies, Hypercom shareholders will receive a
fixed ratio of 0.23 shares of VeriFone common stock for each
Hypercom share they own, valued at approximately $7.32 per share.
VeriFone will also assume Hypercom’s outstanding warrants and stock
options in the transaction.
VeriFone also announced plans
last month to acquire the terminal business of Dutch card maker
Gemalto NV. The deal would vault VeriFone past French terminal
giant Ingenico, which failed in a 2008 bid to buy
Hypercom.
VeriFone’s and Hypercom’s
combined revenue for 2010 is projected to be $1.44bn, while
Ingenico’s 2010 revenue is projected at $1.17bn.
Like VeriFone, Hypercom sells
the credit-card terminals customers are familiar with at checkout
lines and gas pumps. VeriFone also streams digital content to
taxicabs and it sells encryption technology so smaller merchants
can use smartphones to accept credit cards.
Hypercom gives VeriFone
critical reach into key European markets. Earlier this month,
Hypercom posted a record $125.1m in third-quarter sales, up nearly
24% from the same quarter in 2009. Growth was driven by strong
sales in Europe, which were up 21.3%, the company says.
“Hypercom’s strengths are
precisely in places where we are weak, particularly in continental
Europe,” Douglas Bergeron, VeriFone’s CEO, said during a conference
call to discuss the Hypercom deal.
Case for higher
price
Hypercom’s president and
chief executive, Philippe Tartavull, made an artful case for a
higher price by resisting VeriFone’s offer until Hypercom could
disclose its third-quarter earnings, which ably demonstrated that
VeriFone’s offer undervalued his company.
Over the past three years,
Hypercom has increased revenue from almost $290m to approximately
$450m. Its sales in the third quarter of $125m represented a 24%
increase over the year-ago period, while net income nearly
quadrupled to about $4.5m. Those robust figures – and both
companies’ mutual desire to get a deal done – culminated in the
November offer, which has been widely cheered by the street as a
marriage of strengths.
VeriFone’s fiscal
fourth-quarter revenue rose 27% from a year earlier, to $276m. It
says its net income for the quarter ending October 31 2010 was
$49.4m, compared with a net loss of $2.2m a year earlier. Earnings
per diluted share reached 55 cents, up from a net loss of 3 cents a
year earlier. For the fiscal year, VeriFone’s revenue grew 19% from
a year earlier, to
$1bn.
By acquiring Hypercom and gaining presence in the
continental European market, VeriFone believes it is uniquely
positioned to expand the services-driven transformation that is
underway in its North American business into Europe.
