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Though a few dozen regional point-of-sale terminal suppliers continue to ply their trade around the world, acquisitions the past two years have cleared the playing field for France-based Ingenico and its chief American rivals, VeriFone Holdings Inc. and Hypercom Corp.
Analysts say the three global vendors probably will not pursue any of the remaining regional or niche-market suppliers, at least until they digest their own recent acquisitions. VeriFone also needs to put an accounting scandal behind it that some observers believe could cost CEO and former chairman Douglas Bergeron his job.
The industry consolidation began in earnest in 2006 with VeriFone's $800 million purchase of No. 4 POS-terminal maker Lipman Electronic Engineering Ltd. This year, consolidation will nearly double the combined sales of the top three vendors compared with two years ago. Analysts project the industry leaders' revenue to top $2.5 billion this year
Shipments this year will increase by 7% to 10%, predicts Ingenico, which says it supplied 2.6 million terminals in 2007. The other major vendors have not released their shipment data. U.S.-based research firm Mercator Advisory Group has estimated all POS-terminal vendors were to ship 8.4 million units worldwide in 2007, and it projects shipments this year to increase by nearly 10% to 9.2 million.
Ingenico in 2008 will reclaim its spot as the industry's largest vendor in terms of revenue with its acquisition of the Sagem payment-terminal units of France-based electronics and defense supplier Safran. The deal, worth about 200 million euros (US$310 million), makes Safran Ingenico's largest single shareholder.
The greater girth helps the largest suppliers compete geographically, absorb price decreases on commoditizing terminals and develop higher-end devices and related services to seize on market opportunities. Among those opportunities is growing demand for mobile terminals that enable consumers to pay at their tables in restaurants, cover tabs in taxis and settle up at home for plumbing repairs and pizza deliveries
Over the next few years, banks and merchants in Europe, the U.S. and other regions globally must meet mandates to install more-secure terminals. The mandates include pressure from payment card brands to comply with the Payment Card Industry Data Security Standard to deter theft of cardholder account details.
Growth rates for terminal shipments promise to be highest in developing card markets, such as China, Russia and several countries in Africa and the Middle East.
All this bodes well for terminal vendors, which also could offer such additional services as providing merchants gateways that route transactions from mobile terminals to transaction processors and taking care of the contracts with cellular operators whose networks may carry the transactions.
Hypercom Makes Move
Of the big three vendors, Hypercom has the steepest climb to achieve scale and global reach. The money-losing vendor still runs well behind Ingenico and VeriFone in sales. It continues to cut costs, including research and development , and is moving to outsource its manufacturing. Outsourcing now is common in the industry.
Hypercom's $140 million acquisition of the e-Transactions unit of France-based conglomerate Thales, completed in April, gives it a base in Europe, where it had none.
Most observers expected Hypercom to be on the receiving end of the mergers-and-acquisitions trend, not to purchase a company itself. With e-Transactions, Hypercom gains a strong presence in the Germany and market share elsewhere in Europe, along with Thales' unattended terminals for gasoline and parking, which it did not have. Thales had ranked as a distant No. 2 in terminals in Europe after Ingenico, following Ingenico's acquisition of the Sagem units. The Thales unit complements Hypercom's second-ranking U.S terminal business, well behind VeriFone.
While Hypercom and e-Transactions were struggling on their own, the combination creates a viable player in the two largest POS terminal markets, North America and Europe, say observers. Without a strong presence in both markets, scale is difficult.
"Those two regions clearly drive 75% of world market," CEO Philippe Tartavull tells Cards&Payments.
But integrating the Thales unit, roughly the same size as Hypercom, will not be easy, says Gil Luria, an analyst with U.S.-based Wedbush Morgan Securities. "It's still a long road ahead of them–18 to 24 months. Only then will they be able reap the benefits."
The stronger Hypercom will make it that much more difficult for Ingenico to expand its relatively small market share in the United States–less than 15% in 2007, mainly on sales of terminals to multilane retailers.
Perhaps more importantly, Ingenico had hoped to dispatch a weak Thales in Europe, but that is unlikely now, says François Gobron, an analyst with CM-CIC Securities of France.
Ingenico had considered buying Hypercom but expressed only lukewarm interest in the U.S. vendor over the two years before Hypercom's purchase of e-Transactions. That changed after Ingenico learned Hypercom was planning to buy e-Transactions.
Ingenico's Misstep
Ingenico tried to block the Thales deal by suing Hypercom's funding partner and offering a generous $6.25 per share for the vendor in February–more than 50% above Hypercom's stock price at the time. Ingenico CEO Philippe Lazare went public with the offer, hoping Hypercom's shareholders would force the board to nix the deal.
The last-minute offer failed, but not before an angry exchange of letters between Lazare and Hypercom's chairman, Norman Stout, spilled out in public. Each accused the other of negotiating in bad faith.
For Wedbush's Luria, the Hypercom-Thales deal was a significant mistake on the part of Ingenico's management and board. "They had many opportunities to do it [acquire Hypercom]," he says. "They always thought they could get a cheaper price."
Troubles At VeriFone
Meanwhile, VeriFone has yet to recover from an accounting debacle that broke in December, lopping off nearly half of the company's market capitalization in one day after the vendor announced it would have to restate profits for the first nine months of its 2007 fiscal year.
VeriFone said it overvalued its inventory, an error that reduced its pretax profit for the nine months by nearly $37 million.
It did not help matters that Bergeron, VeriFone's brash CEO and, at the time, chairman had netted $1.9 million in late November, just one week before the stock price crashed. He had sold 43,000 shares under a prearranged trading plan.
The accounting error so far has cost Barry Zwarenstein, VeriFone's chief financial officer, his job and Bergeron his chairman's post. And the company, which faces a number of shareholder class-action suits, has seen its stock value continue to fall since the one-day plunge.
As of last month, VeriFone was valued at a little more than $13 per share, down from a high of $50 per share a year earlier. Moreover, VeriFone in late April again delayed the release of its year-end fiscal 2007 and first-quarter 2008 results until the end of July.
All of this increases speculation that Bergeron will be unable to weather the accounting scandal and keep his job. "He's certainly seen the stock go down a lot. Sometimes CEOs are held responsible," Luria says.
VeriFone declined comment. "We certainly wouldn't comment on speculation," a spokesperson says.
But VeriFone's business fundamentals continue to look good, despite widespread customer awareness of the vendor's accounting troubles and vulnerabilities to further profit restatements and legal judgments, said JPMorgan Securities analysts Tien-tsin Huang and Reginald L. Smith in a recent report.
The POS-terminal business is "healthy," and VeriFone remains the "gorilla" in the United States, the analysts concluded. While the sluggish U.S. economy may be delaying plans by restaurant chains to introduce mobile terminals, POS-terminal vendors, in general, have yet to report a slowdown in sales there. "Our sense was that it was business as usual for VeriFone, with no concerning signs of employee attrition," they wrote.
Nonetheless, JPMorgan slashed by half the sales estimates of VeriFone to giant U.S. processor First Data and its POS-terminal supplier arm Tasq. That represents up to a $30 million loss and follows an announcement in April of top certification by First Data of Ingenico's i-Series terminals.
While Bergeron in his swaggering days had boasted his company was the most profitable among its rivals, JPMorgan predicts VeriFone will show a rare net loss of about $200,000 when it finally reports its year-end 2007 earnings. The company should return to a net profit of $30 million in 2008, said the analysts.
VeriFone tries to supplement terminal revenue with services.
For example, VeriFone's VeriShield Protect, announced in April, offers additional protection for merchants beyond that afforded by the PCI standard, according to the vendor. "If we could encrypt the information as it's swiped, information that would be stolen would be essentially useless," says Paul Rasori, VeriFone's vice president of global marketing.
The product would require new terminals or terminal upgrades with the module to encrypt the card data. That data would be decrypted at the merchant's data center or at an acquirer or processor, using software VeriFone also supplies.
Smaller terminal vendors would be hard-pressed to develop these so-called fraud shields. They also would have a difficult time capturing terminal business outside their home turf or market niches.
Whether the big three vendors will try to add to their scale by acquiring any of the regional or niche players remains to be seen, but analysts do not expect any of the top vendors to merge with one another because of antitrust and other reasons.
For the time being, the big vendors will focus on integrating their recent acquisitions, offering innovation and improving their bottom lines, the analysts say. CP
