VeriFone Acquires Hypercom: Consolidation and Anticipation

by George Peabody 0

The shoe finally dropped on VeriFone’s acquisition ofHypercom. On Wednesday, October 17, 2010, the all stocktransaction, valuing each Hypercom share at $7.32, gave VeriFone astrong, complementary product line for a $485 million price.Geographically speaking, Hypercom has been strong in central andsouthern Europe with good growth in Asia -regions of comparativeweakness for VeriFone. The combination gives VeriFone an expandedfootprint in continental Europe, the next market for growth, in itsview, for payment services after the US.

Given Hypercom’s revenues, VeriFone’s acquisition shouldbe “solidly accretive to VeriFone stockholders” and, given G&Aand product line rationalization as well as supply chainefficiencies, VeriFone’s leadership suggests the combined operationshould produce a 15 percent quarterly increase once the deal closessometime in mid 2011. For example, higher volume componentpurchases will help drive down hardware costs for the combinedoperation.

The deal is, of course, subject to Hypercom shareholderapproval and, more important, regulatory approval, particularlywithin the EU. Given the level of POS terminal competition outthere and the growing number of alternative payment methods,VeriFone’s CEO Doug Bergeron does not forsee major regulatoryhurdles to overcome.

VeriFone is anxious to expand its service business tocontinental Europe. There is increasing demand for secure paymentsin Europe despite the EMV rollout. Given the growing complexity ofpayments at the POS, Bergeron believes VeriFone’s “services-drivenbusiness model” should provide what merchants are looking for:outsourced services for encryption, gateways, contactless payments,smartphone activation, etc. Getting these capabilities to merchantsrequires scope, scale, and technical wherewithal. VeriFone believesEurope is ready to follow the evolutionary path of the US towardincreased usage of payment services providers. By acquiringHypercom and gaining a stronger presence in Europe, VeriFonebelieves it has a strong entry point for its new technology andservices.

VeriFone has said it will continue to examine M&Aopportunities. There is technical and business volatility in themarket and M&A is a strong weapon to wield in thesetimes.

VeriFone sees opportunity for highly capable POS terminalsthat can deliver not only payments functionality, but also delivercouponing and other retailing services. This kind of device willrequire significant R&D and this larger VeriFone should havemore resources at its disposal.

It appears, then, that VeriFone is looking to goup-market, into the territory of retail automation giants like IBMand NCR. At the same time, VeriFone is building its servicesbusinesses away from hardware, a prudent move as the impact of themobile transition and the movement of some POS terminal functionsonto the consumer’s smartphone, may mean a lower reliance on POSterminal gear.

As if evidence of payments industry volatility is needed,November saw news rife with NFC-related announcements. The Isisjoint venture of AT&T, Verizon Wireless, T-Mobile, Discover,and Barclays has taken wing. Google also announced NFC support inits upcoming 2.3 version of the Android mobile operatingsystem.

The times they are a-changing.