Schlumberger, the French industrial conglomerate that is active in the manufacturing of smart cards, has acquired Malco Inc., the largest U.S. producer of plastic payment cards.
The acquisition, which had been the subject of persistent industry speculation, was announced last week only after it had been completed.
Schlumberger and Thorn EMI, the British electronics company that had owned Malco since 1976, did not disclose the purchase price. They said Malco will operate as a division of Schlumberger, retaining its name and management under president Louis Bisasky.
Because Schlumberger intends to mass-produce smart cards for the U.S. market, its move was hailed, even by competitors, as confirmation that the technology is advancing rapidly after years in limbo.
"Schlumberger's smart card expertise will provide Malco with the technology necessary to maintain its leading position" as demand for the new cards picks up, said Clermont Matton, executive vice president of Schlumberger Measurement and Systems.
Malco's $27.5 million of annual revenue and 350 employees give its new parent an immediate and significant stronghold in the United States, which is increasingly expected to blossom into the world's largest market for smart cards.
Smart card technology, which enhances the conventional credit or debit card with a microcomputer chip, has been endorsed by MasterCard and Visa as the successor to the aging magnetic-stripe method of data encoding.
Schlumberger and Malco officials said the evolution to chip cards was the biggest consideration in their deal. Mr. Matton said the "strategic significance is clear, given the recent Visa and MasterCard announcements on their migration to chip-based bank cards."
MasterCard International has set a more precise timetable than Visa International to complete a transition to chip cards by early in the next century. But Visa has chip card efforts under way and recently chose Schlumberger to produce some of the first smart cards under a technical standard that MasterCard and Europay International also agreed to.
Malco will augment its extensive production capability - it says it controls half the U.S. "secure card" market that includes MasterCard, Visa, American Express, and the retailing and telephone industries - with Schlumberger's chip technology.
"This will be the first (smart card manufacturing) plant of any consequence in the United States," said Mr. Bisasky of Malco, which is based in Owings Mills, Md. "Others have prototype or sample production lines."
Schlumberger is banking on Malco's market leadership to leapfrog over its closest competitors - Gemplus and the Bull Group - in the U.S. manufacturing race. All three companies are based in France, which, spurred by government high-technology incentives, was the first country to make chip cards standard for banks, pay telephones, and other applications.
Lawrence Linden, formerly chief executive of Malco and now a card industry consultant in Maryland, said Schlumberger has made a sound investment regardless of the chip card's prospects.
"If you're going to get into the card business in the States, this is the way to go," Mr. Linden said. "Malco is and should continue to be profitable, and if smart cards do fly, the banking industry can rest assured that the manufacturers have the capacity to meet their needs.
"One of the things that discouraged the banking industry about smart cards in the 1980s was that the (manufacturing capacity) was nowhere near ready for a rollout."
Schlumberger, like the others, produces most of its chip cards in Europe. Since 1983 it has delivered 270 million smart cards worldwide, including one million in the U.S.
Bull has U.S. production capacity that has been waiting for demand to materialize. Gemplus, which enjoys a market-share edge over each of its chief competitors, has a U.S. factory plan in the works but has been sketchy with details.
"Our plan is unaffected by the Schlumberger announcement, is still on track, and we will be executing it in the next several months," said Dan Cunningham, president of Gemplus Card International in Gaithersburg, Md.
"Timing has been the dilemma" facing all the manufacturers gearing up for the U.S. market, Mr. Cunningham said.
For security and service reasons, card-makers want to put plants as close as possible to the markets they serve. The need for large-scale production, which minimizes unit costs, has to be balanced with the locational preferences.
"The consensus of all the manufacturers is that the U.S. market is going to be the largest in the world for smart cards," Mr. Cunningham said. Schlumberger's acquisition of Malco "is just another affirmation."
"This is a clear indication that people with leadership roles in the smart card industry see the U.S. becoming a very significant market in the next two years," said Ben Miller, a smart card expert in Rockville, Md., who publishes the newsletter Personal Identification News.
He said the manufacturers anticipate demand "like nothing the world has seen" once the U.S. bank card industry gets fully behind chip cards.
"Banks will be looking for secure, high-volume production runs, and Malco, which is No. 1 in secure plastic cards, will be able to embed the Schlumberger chips," Mr. Miller said.
Malco's 1994 card production was about 225 million, said the company's president, Mr. Bisasky. He estimated that all other U.S. secure card makers produced 215 million.
Mr. Bisasky said the chip-embedding process requires "adding a couple of manufacturing steps."
"The technology is quite a big deal," he said. "But it is a technology that Schlumberger has mastered in Europe. They are looking initially to produce cards for the Visa project and fully expect to be offering smart cards to all MasterCard and Visa members down the road."
Mr. Bisasky noted that Malco's two ownership changes have coincided with technological shifts. Thorn EMI, the owner of Capitol Records and a major producer of magnetic tape, took it over in the 1970s when the magnetic- stripe standard took hold.
"History is repeating itself and we are being acquired by a smart card company that keeps us on the cutting edge of technology," Mr. Bisasky said.
He will be reporting to the 1,100-employee smart cards and systems unit of Schlumberger's electronic transactions group. The unit's office in Chesapeake, Va., is headed by Michael H. Smith, general manager.
Schlumberger is a major supplier of smart-card-compatible equipment, having delivered 140,000 point of sale terminals and 150,000 pay telephones worldwide. It has a strategic alliance to share its smart card and POS expertise with the automated teller machine manufacturer Diebold Inc.