Through its deals, VeriFone Systems Inc. could soon become the largest terminal maker in the world.
On Wednesday, the San Jose, Calif., company announced an all-stock purchase of its rival Hypercom Corp. valued at $485 million, including net debt VeriFone would assume.
This is a step up from the $280 million hostile bid VeriFone made public in September.
VeriFone said that after the deal closes in the second half of 2011, Hypercom would bring it a global reach that it has not been able to gain on its own.
"Hypercom's strengths are precisely in places where we are weak, particularly in continental Europe," Douglas Bergeron, VeriFone's chief executive, said on a conference call Wednesday.
Analysts said that by addressing these weak areas, VeriFone would surpass its largest rival, the French terminal maker Ingenico SA.
"It's a case of taking No. 2 and No. 3 and equaling No. 1," said Brian Riley, the research director for bank cards at TowerGroup in Boston.
"By far, it's going to put them ahead of Ingenico."
VeriFone also announced plans last month to acquire the terminal business of the Dutch card maker Gemalto NV.
VeriFone and Hypercom's combined revenue for 2010 is projected to be $1.44 billion, according to an analyst at Wedbush Securities of Los Angeles.
French rival Ingenico's revenue for the year is expected to be $1.17 billion. Ingenico offered to buy Hypercom in 2008 for $6.25 a share.
In an e-mail to American Banker, Bergeron said Hypercom is "a great company that is well worth what we are paying. Once both boards fully appreciated the benefits of the combination, they voted unanimously to support it."
Hypercom's president and chief executive, Philippe Tartavull, made a case for a higher price by resisting VeriFone's offer until Hypercom could disclose its third-quarter earnings, which he said would demonstrate that VeriFone's offer undervalued his company.
On Nov. 2, Hypercom said its net revenue for the quarter rose 23.7%, to $125.1 million from a year earlier.
Its net income rose 275%, to $4.5 million.
In light of Hypercom's stronger earnings, the higher price is "what … [Verifone] needed to pay," Gil B. Luria, an analyst at Wedbush, said.
Under the terms of the current deal, Hypercom shareholders would receive a fixed ratio of approximately 0.23 share of VeriFone common stock for each Hypercom share they own, valued at about $7.32 per share based on the closing price Tuesday.
Luria stressed that the dollar value of the deal is not set in stone — by making an all-share offer, VeriFone is protecting itself from a possible downturn in the market.
"Whatever happens between now and the time of the deal, the deal is still done," he said.
"You are protecting yourself from the economy being worse or the stock market being worse. It is just a little bit less expensive to use your shares to buy a company."
VeriFone and Hypercom may also lose some customers as a result of their planned combination, Luria said.
"If I'm a customer buying from Hypercom, I may not want to buy from VeriFone," he said.
"I'll buy from Ingenico. When you are buying a company, you are buying customers that didn't want to buy from you. They wanted to buy from someone else."
Luria said another risk is that Hypercom's employees might seek other employment ahead of any potential layoffs.
"If you are good, you are going to leave now," Luria said. "And if all your good people leave now, that is going to be pretty bad for your business."
VeriFone said it might have to spin off Hypercom's U.S. business out of antitrust concerns, but Riley said that VeriFone could make the case for keeping that part of Hypercom's business.
"They shouldn't necessarily have to [sell the U.S. business], because it is a highly competitive market in the first place," he said. "There are other big players on the block."
A spokesman for Hypercom did not return a request to comment.
