Atos' $5 billion offer for Gemalto is a timely cure for the EMV hangover

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Gemalto’s business boomed a couple of years ago at the peak of the U.S. EMV migration, but when new card orders tapered off and payments technology turned in new directions, the company’s profits got hammered.

Now France-based IT services company Atos is offering to buy Netherlands-based Gemalto for $5 billion, attracted by Gemalto’s various identity, security and payments technologies that increasingly come into play in the emerging Internet of Things market where Atos hopes to play a broader role, experts say.

Atos Group’s CEO Thierry Bretos, a former finance minister for France, sees global business opportunities in the deal, backed by French investment bank Bpifrance, which controls 8.3% of Gemalto’s stock.

“We believe that a combination of Atos and Gemalto would result in enhanced global leadership in cybersecurity, digital technologies and services and in the strengthening of our positioning as a leading European payment services provider,” Breton said in a Monday press release.

Analysts say the offer is a good fit for both companies, given the fact that 43% of Gemalto’s revenue comes from Europe, the Middle East and Africa, where Atos primarily operates. The U.S. accounts for 28% of Gemalto’s revenue, with the remaining 29% divided among Asia and the other remaining global regions, according to a financial analysis Atos released Tuesday.

Only 30% of Gemalto’s revenue—the largest individual bucket among its various businesses—comes from payments, so Atos’ interest in buying the company is aligned with Gemalto’s ambitions in identity and border-control solutions for government agencies.

But there are aspects of Gemalto’s payments business that could prove compelling for Atos as the IoT gains momentum and demand rises for technology to provide secure payments connections within objects from the kitchen to the garage.

“Gemalto rode the wave of extreme demand for EMV cards that peaked in 2015, followed by a sharp decline that has put them into the trough of that cycle this year, and they're hurting from it,” said Philip Andrae, principal of Philip Andreae & Assoc., a former executive at Oberthur, which competes with Gemalto in several areas.

By acquiring Gemalto, Atos spots an opportunity to capture the next wave of development in payments and secure identification technology through a vertical integration that could benefit both companies, Andreae said.

As a broad systems integrator not unlike IBM in its capabilities, Atos could play a role in connecting different industries for payments, said Tim Sloane, head of payments innovation at Mercator Advisory Group.

“Gemalto has a tokenization platform that can be used internationally and perhaps even in the U.S., if the major card networks continue to loosen their grip over third-party trusted service providers (TSPs),” Sloane said, noting that First Data currently is operating as a TSP in one pilot with Mastercard to manage provisioning of payment card credentials.

Delivering TSP services typically requires a card-provisioning infrastructure, which Gemalto could provide for IoT devices, but the technology may go another direction, Sloan said.

“It’s unclear whether Gemalto or Atos would apply [the TSP] technique to the broader IoT marketplace, as there are many different security approaches being investigated,” Sloan said.

Gemalto has been looking for growth in new arenas for more than a year. When CEO Philippe Vallee took over in 2016, he aimed to expand via acquisition, but at least one key deal to buy a biometrics firm failed to come to fruition.

Atos proposed the all-cash deal on Nov. 28, and disclosed details on Tuesday, boosting Gemalto’s stock, which has been in a long-term slump.

Gemalto has signaled profit warnings over the past year. In March 2017, Gemalto reported a double-digit decline in card production and sales.

In a Tuesday press release, Gemalto said it plans to respond to the proposed deal by Friday.

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EMV Internet of things M&A Atos Gemalto France The Netherlands