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Every corporate merger presents risks to the companies involved and their owners, employees, and customers. Leading U.S.-based point-of-sale terminal maker VeriFone Systems Inc.’s planned takeover of smaller rival Hypercom Corp. is no exception: a recent regulatory filing detailing VeriFone’s merger plans devotes 26 pages to a host of risks.
Of course, many of the risks listed are standard for any merger, such as the possibility that shareholders would not reap the financial rewards they expected or that key employees would stay with the combined company. But the registration statement, or S-4, that San Jose, Calif.-based VeriFone filed late last month with the Securities and Exchange Commission shines some light on both companies’ operations and the tough industry in which they operate.
The document says, “The combined company’s markets are highly competitive and subject to price erosion.” The filing notes that VeriFone’s largest customer, leading merchant processor First Data Corp., also is a competitor. “First Data … has developed and continues to develop a series of proprietary electronic payment systems for the U.S. market,” it says. That’s a reference to the FD line of terminals First Data introduced for its smaller merchants more than four years ago (Digital Transactions News, Oct. 26, 2006). First Data uses an Asian contract manufacturer to produce the FD terminals. VeriFone and First Data have plans for VeriFone to produce some future FD products, though neither company has yet divulged details.
After rejecting VeriFone’s $283 million bid in September, Hypercom in November agreed to an all-stock buyout valued at about $485 million (Digital Transactions News, Nov. 17, 2010). Citing legalities, both companies declined to talk about the pending merger.
One important risk is the reaction by independent sales organizations, value-added resellers, acquirers, and other distributors that sell or lease VeriFone and Hypercom products to merchants. Both companies depend on a small number of companies for an outsized portion of their revenues. VeriFone’s ten largest customers accounted for approximately 27% of the company’s $1 billion in net revenues for fiscal 2010 ended Oct. 31, according to the filing. Although no individual customer accounted for more than 10% of net revenues, just three brought in 15% of revenues. The largest customer of Scottsdale, Ariz.-based Hypercom generated 5.2% of Hypercom’s $406.9 million in net revenues in calendar year 2009, and the company’s five largest customers accounted for 19% of net revenues. “If any of the combined company’s large customers significantly reduces or delays purchases from the combined company or if the combined company is required to sell products to any large customers at reduced prices or on other less favorable terms, the combined company’s revenues and income could be materially adversely affected,” the document says.
Common customers of VeriFone and Hypercom might route their business away from the merged company in order to reduce dependence on a single supplier, the filing notes. Meanwhile, Hypercom has some suppliers, distributors, customers, and licensors that compete with VeriFone or work with VeriFone’s competitors and could terminate their business as a result of the merger. Some also have agreements with Hypercom that require their consent in connection with the merger, and failure to obtain such consent could have harmful effects.
A VeriFone-Hypercom combo also would find itself competing with producers of electronic cash registers with payment capabilities and with software developers that enable online card payments, the filing says. Both companies already find themselves in such a situation, but the filing indicates that the need to continually develop products with competitive features and pricing will only get stronger.
Another big if is regulatory approvals. VeriFone has said the main reason it wants Hypercom is that company’s strong presence in a number of European markets where VeriFone is weak, and is willing to spin off Hypercom’s U.S. business if required. The filing pegs the 2009 revenues of potentially divested businesses at $124 million. The companies have a long closing date, not until this year’s second half, partly because of the need for European regulators to weigh in.
