The Green Sheet Online Edition
April 09, 2007 • Issue 07:04:01
POS terminal makers take off the gloves
By all accounts, the terminal market worldwide shows strong growth. Yet, terminal manufacturers are using aggressive tactics usually seen in shrinking markets.
VeriFone made a play for Hypercom Corp.'s customers March 19, announcing a multimillion-dollar plan to write software conversion interfaces to enable Hypercom users to work with VeriFone platforms.
VeriFone Chairman and Chief Executive Officer Douglas G. Bergeron claimed many of Hypercom's products lack certification to the Payment Card Industry Data Security Standard (PCI DSS), a claim refuted by Hypercom.
The announcement came four days after an activist investor criticized Hypercom's corporate strategy and suggested that management consider putting the company up for sale.
And VeriFone made the offer to Hypercom customers the day before Hypercom announced it had received PCI certification on its newest P4100 PIN pad.
George Sutton, Managing Director at Craig-Hallum Capital Group and an analyst in the terminal market, suggested the timing of VeriFone's announcement in relation to Hypercom's PCI news was not coincidental. VeriFone's proposal to convert Hypercom customers "was pure marketing," he said.
Toe to toe on PCI
"My sense is both Hypercom and VeriFone are at similar points in the [PCI certification] process. They both have a handful of products" that meet the PCI DSS, Sutton said.
"We have a broad range of PCI-compliant products," a Hypercom spokesman said. "Mid-year, we will introduce the highest security, largest memory and broadest feature set of any countertop device."
The company's PCI-compliant products currently include multilane terminals, mobile wireless terminals and two PIN pads. All six countertop products to be introduced in coming months will be PCI-approved, he added.
VeriFone's offer to convert customers "looks like a desperate act for a company that's been laying off dozens of people in the last few weeks," Hypercom's spokesman said. "It's a sales pitch."
He attributed the offer to Hypercom's competitive position: "We believe we may be taking market share from them with our products."
VeriFone confirmed that the company has laid off approximately 100 "overlapping positions" or less than 5% of a total workforce of 2,400, as a result of the Lipman acquisition last October. "The reductions were a mix of employees from both organizations," the company stated in an e-mail response to questions.
Since making its offer, VeriFone has received a response from 10 Hypercom customers, according to VeriFone.
Bergeron had claimed Hypercom customers "are concerned about the company's future and speculation about a possible sale."
Selling the company was the final option proposed by investor Robert L. Rosen, Managing Partner of RLR Capital Partners and RLR Focus Fund LP, in a letter to Hypercom March 18.
RLR Capital has acquired 5.1% of outstanding shares of Hypercom, according to the letter. Securities and Exchange Commission filings show that RLR has bought most of those shares since Jan. 1, 2007. A 5.1% stake puts RLR among the top five institutional holders of Hypercom stock.
Hypercom's stock, which traded above $10 in May 2006, was trading in the $5.50 to $6 range at press time.
Rosen criticized Hypercom's intention to use its cash to acquire companies in the terminal services market, rather than repurchase its own shares. He urged management to buy back one-third of its outstanding shares and focus on improving operating margins.
If the company is unable to meet its sales growth and operating-margin targets during the current year, its board of directors should review alternatives, "including a possible sale," he stated.
Such shareholder activism is becoming increasingly common, Sutton said. "The key points [Rosen] made were fair." Sutton said he would prefer to see Hypercom do a combination of stock buybacks with "well-thought-out strategic acquisitions."
A Hypercom spokesman said, "We have received the letter, we are reviewing it, and we will respond in an appropriate manner at an appropriate time.
"It sure sounds like VeriFone is suggesting that customers don't want a choice, that they are supportive of a monopoly in the marketplace," he added. "Customers want to have choices so they are not held hostage by one vendor in this space."
The terminal market has plenty of room for growth, Sutton said. "We continue to see worldwide expansion of payment terminals."
However, the stakes are rising in the terminal hardware business, said Dan Schatt, Senior Analyst with Celent LLC. Manufacturers now have to compete with customers like First Data Corp., making market dynamics more unpredictable. "You can see what First Data has done, coming out with a do-everything terminal to lock down merchants."
Sutton said although Hypercom has been playing "catch-up" to VeriFone, its product offerings have improved "greatly." Lipman had a "very strong wireless platform, and I think VeriFone's strength has been in the multilane market. Hypercom's is in the ISO channel." He predicted Hypercom's Blade product will prove to be popular in the wireless market.
In Hypercom's most recent earnings call with investors, executives discussed coming products. "We will bring out a new unattended product for outdoor kiosks and integrated systems," said William Keiper, Hypercom CEO.
The modular, 32-bit product will be based on the Linux operating system and feature a full-sun-readable active-matrix color screen.
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