Hypercom's U.S. Business Will Continue Its Course, Buyer Says

The private-equity firm that is buying Hypercom Corp.'s U.S. payment terminal business says it has no plans to make any disruptive changes.

Gores Group LLC's agreement to buy the business was required under the settlement of an antitrust lawsuit the Justice Department filed in May to block VeriFone Systems Inc.'s $485 million acquisition of the remainder of Hypercom.

"We evaluated [Hypercom]'s products and we do feel their current product is superior to what's out there from a competitive standpoint," Michael Hirano, a managing director of operations at the firm, says.

In documents filed on Thursday in the U.S. District Court for the District of Columbia, the Justice Department said a sale of Hypercom's U.S. terminal business to Gores "will preserve competition" in the market for point of sale terminals, which merchants use to accept credit and debit card payments.

Aside from VeriFone and Hypercom, French terminal maker Ingenico SA is the only other major competitor in the U.S. market.

As part of the settlement, VeriFone must sell all "tangible assets" of Hypercom's U.S. terminal business to Gores, including manufacturing equipment, materials and supplies, customer lists, customer contracts and licenses to patents for the development and production of its terminals.

Gores also has the right to hire Hypercom's U.S. terminal employees without interference from VeriFone, including core engineers and developers, "to continue the roadmap they had in place," Hirano said. "We're not deviating from what was planned in the U.S. from a product" standpoint.

While the deal helps eliminate uncertainty for VeriFone and Hypercom, the settlement may cause some of Hypercom's U.S. retailer customers to pause on buying decisions, says Gil Luria, an analyst who follows VeriFone for Wedbush Securities LLC.

Private-equity firms are primarily concerned with generating cash flows and are less concerned with "investing in new technology and product sets," Luria says.

"A merchant wants to know … you'll improve your product," Luria says. "They'll want to know that you'll maintain your product [and] you can't necessarily get that from a smaller firm and you can't necessarily get that from private equity."

Hirano insists that Gores, which is based in Los Angeles, is committed to building on the business in the U.S. and potentially expand to international markets.

"It's completely seamless to the customer," Hirano says. "Any customer that's U.S.-based is coming with the transaction."

Gores is not aware of any significant client defections as a result of previous uncertainty over the VeriFone-Hypercom deal, Hirano says.

"We did … our due diligence," Hirano says. "I spoke to a number of the largest customers."

The Justice Department says Gores is a logical buyer because of its previous experience in the payment terminal business. Gores purchased VeriFone from Hewlett-Packard Co. in 2001. Gores and a partner later recapitalized VeriFone, which went public in 2005.

"Given Gores' financial resources, management expertise and POS terminals industry knowledge, Gores is well positioned to successfully compete with the merged firm in the development, production, distribution, and sale of POS terminals in the United States," the Justice Department said in its filings.

Allen Weinberg, a managing partner with the payments consulting firm Glenbrook Partners, says that concerns over whether a new operator in the industry "has the skills and the resources and the stomach to reinvest in the business" are legitimate. But Gores has "a history in the business," Weinberg says.

Regardless of the buyer, ensuring there is a third competitor in the payments terminal industry is crucial, says Weinberg, who used to handle the purchase of terminals from VeriFone and Hypercom in the mid-1990s for the payments services company First Data Corp., now a unit of Kohlberg Kravis Roberts & Co.

"For the merchants and [merchant] acquirers, the presence of a third supplier is really important," Weinberg says, adding that when he was handling negotiations at First Data "it was important to be able to play the vendors off each other" to get the best price.

VeriFone and Hypercom announced an agreement to merge in November. To attempt to satisfy antitrust concerns, VeriFone in April agreed to sell Hypercom's U.S. terminal business to Ingenico for $54 million.

The Justice Department filed its suit in May, arguing that a sale to Ingenico would not eliminate antitrust issues because such a deal would not result in a third, independent competitor in the U.S. payment terminal market.

"The POS terminals industry in the United States is extremely concentrated," the Justice Department said in its filings on Thursday.

The settlement would "enable Gores to become a new, independent, economically viable competitor in the sale of POS terminals in the United States," the agency said.

VeriFone on Thursday said that it completed its acquisition of Hypercom and sold the U.S. business to Gores.

A spokesman for VeriFone did not make an executive available for an interview on Friday but in an email said that the companies' operations are already integrated. The San Jose, Calif., company "plans to grow and enhance all major product lines that existed prior to completing this acquisition," the spokesman wrote.

Hypercom said in a press release on Thursday that in addition to selling its U.S. terminal business to Gores, it also sold its U.K. and Spain businesses to a subsidiary of the El Segundo, Calif., investment firm KleinPartners Capital Corp.

VeriFone's acquisition of Hypercom "should create new growth opportunities and deliver a significant opportunity for our shareholders to benefit from being owners of an even stronger global company," Philippe Tartavull, the chief executive and president of the Scottsdale, Ariz., company, said in the release.

A spokesman for Ingenico would not comment on Friday.