Gores Group LLC, the private-equity firm buying Hypercom Corp.’s U.S. payments-terminal business, says it has no plans to make any disruptive changes.
“We evaluated [Hypercom]’s products, and we do feel their current product is superior to what’s out there from a competitive standpoint,” says Michael Hirano, a managing director of operations at Gores.
ISO’s are watching with great interest as the scene unfolds in the terminals business because keeping the market competitive enables them to play the vendors off of each other to lower prices, observers say.
Gore’s agreement to buy the business for an undisclosed amount 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.
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, the Justice Department said in documents filed Aug. 4 in the U.S. District Court for the District of Columbia.
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 says. “We’re not deviating from what was planned in the U.S. from a product” standpoint, he says.
The deal helps eliminate uncertainty for VeriFone and Hypercom, but 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,” he 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 a logical buyer because of its previous experience in the payment-terminal business, the Justice Department contends. Gores purchased VeriFone from Hewlett-Packard Co. in 2001. Gores and a partner later recapitalized VeriFone, which went public in 2005.
Allen Weinberg, a managing partner with the payments consulting firm Glenbrook Partners, says 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 payment-terminal market is crucial, says Weinberg, who used to handle the purchase of terminals from VeriFone and Hypercom in the mid-1990s for transaction processor 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.
