Through its acquisitions, VeriFone Systems Inc. soon could become the largest terminal maker in the world.

On Nov. 17, the San Jose, Calif.-based company announced an all-stock purchase of its rival Hypercom Corp. valued at $485 million, including net debt VeriFone would assume (see story).This is a step up from the $280 million hostile bid VeriFone made public in September.

The companies expect to close the deal in the second half of 2011, following Hypercom shareholder and regulatory approvals.

Hypercom would bring VeriFone an immediate global reach 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 during a conference call to discuss the Hypercom deal.

By addressing these weak areas, VeriFone would surpass its largest rival, France-based terminal maker Ingenico SA, analysts say.

“It’s a case of taking No. 2 and No. 3 and equaling No. 1,” says Brian Riley, 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 Dutch card maker Gemalto NV (see story). 

VeriFone’s and Hypercom’s combined revenue for 2010 is projected to be $1.44 billion, according to a Wedbush analyst. Ingenico’s revenue for the year is projected at $1.17 billion. Ingenico offered to buy Hypercom in 2008 at $6.25 a share (see story).

In an e-mailed statement to PaymentsSource sister publication 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.

In light of Hypercom’s stronger earnings, the higher price is “what … [VeriFone] needed to pay,” says Gil B. Luria, an analyst at Wedbush Securities of Los Angeles.

Under the terms of the approved deal, Hypercom shareholders would receive a fixed ratio of approximately 0.23 shares of VeriFone common stock for each Hypercom share they own, valued at approximately $7.32 per share based on the Nov. 16 closing price.

Luria stressed that the dollar value of the acquisition 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 says. “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 also may lose some customers because of their planned combination, Luria says.

“If I’m a customer buying from Hypercom, I may not want to buy from VeriFone,” he says. “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.”

Another risk is Hypercom’s employees might seek other employment ahead of any anticipated layoffs, Luria says. “If you are good, you are going to leave now,” he says. “And if all your good people leave now, that is going to be pretty bad for your business.”

VeriFone says it might have to spin off Hypercom’s U.S. business out of antitrust concerns, but Riley says 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 says. “There are other big players on the block.”

A spokesperson for Hypercom did not return a request to comment.

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