Hewlett-Packard to Buy Verifone for $1.2 Billion

Hewlett-Packard Co. raised the stakes in the emerging electronic commerce market by announcing it would acquire Verifone Inc., the prominent transaction automation company, for $1.2 billion.

The partners said Wednesday they signed a definitive agreement and expect to complete the stock transaction by midsummer, an outgrowth of a strategic relationship that had become increasingly close over the last year.

Financial analysts deemed the price high, at 2.5 times 1996 revenues, but said Hewlett-Packard is breaking new ground. The California-based computer giant is placing a heavy bet on Verifone's pioneering development of payment systems for the Internet.

Both companies have strong ties to, and aspirations for growth from, the banking industry, which is sure to view the combined entity in an entirely new light.

While Verifone will remain focused on its traditional business of supplying card-reading point of sale terminals, with Hewlett-Packard it expects "to sharply accelerate the acceptance of electronic commerce," said Hatim A. Tyabji, Verifone's chairman, president, and chief executive officer.

"Payments are everything in electronic commerce," said Richard E. Belluzzo, executive vice president and head of Hewlett-Packard's computer organization.

"The Internet has been central to our strategy for some time," he said, emphasizing Verifone's fit with Hewlett-Packard's "extended enterprise" philosophy-using networks to extend a company's reach to any office or customer location.

"We are very familiar with financial institutions around the world," added Mr. Tyabji. "HP has a formidable distribution infrastructure that will enable us to penetrate markets faster and in a more cohesive manner than we could have by ourselves."

The two executives-Mr. Belluzzo will oversee the merger and Mr. Tyabji will retain his role at what will become an "independent subsidiary"-both said the combination brings electronic commerce closer to reality.

The "ability to move money" was a necessary link that Verifone can complete in the "extended enterprise" framework, Mr. Belluzzo said.

He said both companies will continue to emphasize strategic alliances and partnerships, but decided their common goals would best be met through a full-scale marriage: "We couldn't have achieved (the benefits of a Verifone merger) in any other type of partnership."

"We've already made credit and debit card transactions fast, secure and easy," said Mr. Tyabji. "Now we plan to make secure Internet transactions a reality.

"In addition, we see vast and exciting applications for smart cards that hold information ranging from bank balances and frequent-buyer reward programs to health records and cashless transactions."

Verifone is involved in scores of smart card tests. Hewlett-Packard is a member of the ImagineCard alliance with Gemplus of France and Informix Inc., with a view toward using the technology for identification and authentication on the Internet and intranets.

The notion that this corporate linkage can be bigger than the still small sum of its electronic commerce parts resonated with Citibank vice president Henry Lichstein, who just last week participated in the announcement that the Citicorp unit would be the first to test Verifone's hand-held smart card terminal, the Personal ATM.

"It's very exciting, an opportunity to accelerate the introduction of electronic commerce," Mr. Lichstein said of the merger.

"The pieces of the electronic commerce puzzle can all be seen and are in place, but they are not put together as well as they might be," the Citibanker added. He said the synergies between Verifone's "terminal-skill base" and Hewlett-Packard's emphases on enterprise computing and security "provide reason to be very hopeful about the realization of the expectations of many of us."

Karen Epper, analyst at Forrester Research in Cambridge, Mass., viewed the deal as an "E-commerce play" with numerous intersecting interests. For example, Hewlett-Packard is active in the PC/SC WorkGroup, developing standards for smart card readers on personal computers-potentially opening up the home market at which Verifone is aiming the Personal ATM.

"HP gives Verifone contacts it doesn't have in the consumer market," Ms. Epper said, "and Verifone takes HP beyond what it can do with Virtual Vault," a security system for on-line transactions that the computer company acquired and incorporated in its enterprise products last year.

"We believe in leveraging the Verifone technology," HP's Mr. Belluzzo said. "This is not just a consumer play."

Executives at both organizations emphasized their compatibility not just in product lines-their joint development and marketing of transaction systems since early last year led to the merger negotiations (see box)-but also in terms of culture.

The companies' headquarters are a short drive apart in the Silicon Valley region south of San Francisco. They are steeped in the area's entrepreneurial traditions. Decentralization is a common religion; in his zeal to be "virtual," Mr. Tyabji does not like to regard Verifone's Redwood City, Calif., administrative office as a true headquarters.

"The two companies are very much alike," Mr. Tyabji said. "We are not mixing oil and water. Our people think alike, work alike, and behave alike."

Said Glenn Osaka, general manager of HP's enterprise systems business unit, "We have been working with Hatim and his organization for a year and a half, and a common reaction among our people was, 'Verifone is a great company. I'd love to work for that company.' They are a breath of fresh air."

Still, Verifone is 16 years old, a product of the bank card industry's desire to automate the authorization process. Hewlett-Packard was founded in a fabled garage in the 1930s. Verifone's 2,900 people are dwarfed by HP's 128,000, though each company has distributed products to more than 100 countries.

"There will be some cultural differences, but the core values are consistent," Mr. Osaka said.

"The organization chart on paper is irrelevant," Mr. Tyabji said. "You need human chemistry and rapport. What we have here is a chemistry that is unique for these kinds of circumstances.

"Our culture will not be subsumed, it will be enriched and enhanced. If I did not feel that way, I would not be here."

He said the companies have resolved not to get bogged down in "administration and integration issues" and instead will "focus on the important stuff" of electronic commerce marketing and experimentation.

The one-for-one stock swap terms sent Verifone's share price up $16.875 Wednesday, to $47. Hewlett-Packard's was off $1.50 to $49.375.

Verifone recently told analysts that its revenues, $472.5 million in 1996, would rise to $1.2 billion by 2000. But with its two-year-old electronic commerce thrust still in development mode, 90% of the sales are hardware-related. Verifone wants to reduce that to 67%, with software rising to 33%, by 2000.

While Verifone has "good presence in the electronic commerce market, the revenues have not come in yet," said Lehman Brothers research analyst Michael Nimeroff. "The model they have created has yet to be proven."

Patrick Burton, Mr. Nimeroff's boss at Lehman in New York, said, "The world is moving more toward debit and smart cards at the point of sale, HP clearly wants to be a player in that market with both their PCs and servers, and Verifone is a very nice fit."

He added that Verifone is better off as part of a larger company, which in turn will benefit from Verifone's banking industry strengths. The price tag was "high but fair," given that Verifone is a market leader, and Verifone's small size relative to HP makes the deal less speculative than it might appear.

Albert Irato, president of Verifone point of sale rival Hypercom Corp. in Phoenix, said Hewlett-Packard apparently decided to buy technology that it found too expensive or complicated to develop itself.

Mr. Irato described the pairing as "interesting but curious. HP is primarily an office automation company and Verifone is a payments company." More skeptical than other outsiders about their ability to blend, Mr. Irato said, "There were also plenty of obvious synergies when AT&T and NCR got together"-a merger that ended disastrously.

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