Verifone Holdings Inc. bought Israel’s Lipman Electronic Engineering Ltd. last week for a total of $793 million, giving Verifone pole position against its nearest rival in the point-of-sale terminal business, Hypercom Corp.
The deal, expected to close following regulatory and shareholder approvals in the fourth quarter, is engineered around a complex combination of cash and stock. It includes a special dividend that the companies would only say would likely exceed $23 million. An unspecified cap on the deal, based on undisclosed conditions, makes it almost impossible to fully value the transaction. Verifone is borrowing most of the money for the deal from an unidentified lending syndicate, and refinancing its existing debt, for a total of $540 million.
The stock market liked the deal: Verifone’s shares spiked more than 10 percent on the news before trending back to the $30 range at which they had been trading before the news.
One good reason for that approval is the fact that Lipman’s business is strongest in relatively untapped markets like India, China, Eastern Europe and Brazil, all of which have relatively under-developed point-of-sale terminal markets. Lipman's product line is strong in advanced point-of-sale terminals, including contactless and Internet-protocol devices, and advanced ATMs.
“Arguably, the growth of this industry is in the emerging markets,” says Sam Ditzion, president of Tremont Capital Group. “Look at China. The percentage of consumers that have credit or debit cards today, versus five or ten years form now, is going to be absolutely extraordinary.”
That phenomenon is also in operation in the other markets Lipman has been active in, says Ditzion, and should greatly help Verifone’s future growth, assuming Verifone can preserve and extend Lipman’s footprint in those markets.
The deal will also reinforce Verifone’s bottom line. Verifone’s 2005 net income was $33.2 million on revenues of $485.3 million, and Lipman’s were $20 million on revenues of $235.4 million. Hypercom, by contrast, reported a 2005 net loss of $33.3 million on revenues of $245.2 million.
What the deal will not do is bring Verifone into the ranks of corporate point-of-sale vendors, a space currently dominated by IBM and NCR Corp. Aside from the sheer size disparity—NCR’s 2005 net income was $529 million on net revenues of $6 billion—Verifone and Lipman both sell to smaller operations than the large retail chains that typically use IBM and NCR systems.
This fact hasn’t diminished investor enthusiasm for Verifone. Since it went public last May, Verifone’s stock has risen over 300 percent; shares originally priced at $10.50 now trade in the $30 range.
The general approbation on Wall Street wasn’t universal, however; Standard & Poor’s, for instance, lowered its outlook on the announcement to negative from stable, mainly because of execution concerns. S&P left its credit rating of Verifone at BB-.
“It does seem that this acquisition cements Verifone’s lead [in its niche],” says Lucy Patricola, the S&P analyst who covers Verifone. ”Our concerns were really that they have yet to do an acquisition this substantial. From what I know, management has done very well running Verifone, so they certainly bring something to the table, but this acquisition is of a size and a scope in which they’re untested.”
The problem for Verifone is that it is already composed of several product lines from previous acquisitions, and it’s acquiring quite advanced systems from Lipman, including terminals in which Verifone has little experience manufacturing or supporting.
That combination—unabsorbed product lines combined with new, advanced products—will be a challenge for Verifone executives, despite their good track record, and is an issue that’s tripped up acquisitions before.
This is especially true because acquisitions typically result in a certain exodus of top executives and important technical staff of the acquired company, stripping the buyer of the talent and internal knowledge it needs to hit the ground running with its new products. Considering the fact that so many of Lipman’s recent sales have been in relatively underdeveloped markets—markets that lack the sort of readily available, technical support infrastructure that’s a commonplace in the United States—those facts may result in unexpected problems for Verifone, in turn creating sudden expenditures.
“Those are some of our concerns,” says Patricola. “There’s also the concern that the increase in leverage might be worse than they’re projecting because of some issue [related to integration matters] that might lead them to spend more money than they’re planning to.” Integration costs, she adds, “are always the issue.” (Contacts: Tremont Capital Group, Sam Ditzion, 617-482-8866; Standard & Poor’s, Lucy Patricola, 212-438-3006)