Wednesday, May 18, 2011
A Department of Justice complaint filed in Washington May 12, 2011, alleges VeriFone Inc.'s proposed $485 million offer to buy Hypercom Corp. violates provisions of both the Clayton Antitrust Act and the Sherman Antitrust Act. The government further alleges Hypercom's subsequent attempt to avoid antitrust concerns by licensing Hypercom's business in the United States to Ingenico for five years also violates antitrust laws.
The DOJ complaint asks The District Court for the District of Columbia to stop the Hypercom acquisition by VeriFone and the licensing of Hypercom business to Ingenico.
According to the DOJ, three companies, VeriFone, Hypercom and Ingenico SA, account for 92 percent of all POS terminals sold in the United States; collectively, VeriFone, Hypercom and Ingenico sell nearly 80 to 90 percent of POS terminals worldwide.
"The combination of VeriFone and Hypercom would likely lead to retailers paying higher prices for POS terminals," DOJ Antitrust Division Assistant Attorney General Christine Varney stated after filing the complaint. "The proposed divestiture does not resolve the significant competitive concerns posed by the merger, and in some ways exacerbates them."
The VeriFone deal to buy Hypercom was disclosed in November 2010. In April, Hypercom issued a statement saying it had an agreement to license its U.S. business to Ingenico. The DOJ voiced concern that the Hypercom sale leaves only two POS sales organizations of consequence in the U.S. market and would leave the market vulnerable to price collusion between VeriFone and Ingenico. The government also said it does not believe spinning off U.S. business to Ingenico solves the antitrust issues raised by the proposed purchase.
By simply filing the complaint the government appears to have met at least one of its stated goals: stopping the Ingenico takeover of Hypercom's U.S. business.
Ingenico, a French corporation, said the delay caused by the complaint may cause its deal with Hypercom to fall through. "Considering the timeline, Ingenico anticipates that it may not be in a position to successfully close the deal," the company stated in a press release. "Ingenico regrets the decision of the DOJ as it considers that the transaction would make sense for the customers, reinforcing competition in the U.S. market. Ingenico considers that it has the required assets … to offer attractive solutions to small merchants and large retailers on the U.S. market."
VeriFone and Hypercom, in a joint statement released May 16, responded to the DOJ action saying, "VeriFone and Hypercom intend to work with the DOJ to better understand its concerns and assess various options for the planned divestiture of Hypercom's U.S. business, including the possibility of a divestiture to an alternative buyer. The companies continue to believe in the compelling benefits that the merger will provide to customers, employees and stockholders. Assuming a successful resolution of this and other closing conditions, the companies believe that the merger can be completed in the second half of 2011."
The DOJ sees a much more complicated antitrust landscape than the one painted by the three payment companies. Its complaint asserts that if the pair of deals goes through nearly all competition in the sale of POS terminals in the United States would be eliminated. "VeriFone and Ingenico, the only two remaining competitors of significance, would become so intertwined and codependent in the United States that they would operate more as affiliates than as competitors," the DOJ alleges. "These transactions would result in VeriFone and Ingenico becoming a cooperative duopoly in full control of the sale of POS devices in the United States."
The DOJ considers standalone POS terminals and multilane terminals to each represent a different segment of the POS terminal market and subject separately to antitrust laws.
The government notes VeriFone is the king of POS terminal sales in the United States reigning over 48 percent of the U.S. market. Hypercom is the number three retailer capturing 18 percent of the market. Ingenico currently owns approximately 26 percent of retail sales in the United States.
The complaint quotes VeriFone Chief Executive Officer Douglas Bergeron saying the POS terminal industry is showing signs of becoming a "very benevolent duopoly" of VeriFone and Ingenico. The DOJ asserts VeriFone, as a result, is avoiding competition in favor of cooperating with competitors at the expense of consumers.
"This [VeriFone deal] would inevitably lead to higher prices, inferior service, a reduction in the variety of products sold and reduced innovation," the government lawyers assert.
As to the Ingenico-Hypercom proposition, the complaint states, "The proposed deal with Ingenico has two fundamental flaws as a remedy for the anti-competitive effects of the VeriFone/Hypercom transaction. First, licensing the assets to Ingenico would eliminate the competitive discipline Ingenico provides today even as a smaller seller in the … POS terminals market and fails to replicate the three-way competition. … Second, even setting aside Ingenico's current participation in the relevant markets, the structure of the agreement, which is akin to a franchise agreement rather than a clean divestiture, would not give Ingenico the means and incentive to maintain the level of premerger competition."
The DOJ stated the Ingenico deal "exacerbates, rather than mitigates the antitrust issues." It stated the three-way agreement among the companies is not a "bona fide sale" but, rather, it is "a complex licensing agreement whereby Ingenico would essentially become a Hypercom franchisee … with the exclusive right to sell Hypercom POS terminals in the United States for five years."
In addition, the DOJ indicated the Hypercom-Ingenico deal is referred to by the companies as a "franchise agreement" and that, under the agreement, Ingenico would not own the intellectual property associated with the Hypercom devices. The agreement further provides that Ingenico may not modify or improve the devices and must allow Hypercom to support the devices, including performing upgrades, fixing bugs and offering technical support. The DOJ noted VeriFone is thus a party to the Hypercom-Ingenico franchise agreement, so the franchise agreement is dependent on the VeriFone takeover of Hypercom.
"This contradicts defendants' claims to the public that the Hypercom franchise agreement is a straightforward sale of Hypercom's U.S. business to Ingenico," the complaint states. It adds the agreement, in essence, eliminates Ingenico as a competitor for VeriFone and encourages the companies to coordinate rather than compete, harming consumers, businesses and commerce.
"Coordination, whether tacit or explicit, is especially likely because the acquisition would enhance each company's ability to deter competitive behavior in one market by retaliating across a range of other product and geographic markets, if necessary," the government lawyers assert.
The complaint alleges Ingenico intends to move customers away from Hypercom products to its own devices by porting some of the software and applications from Hypercom devices to Ingenico terminals, leaving consumers with only a choice between VeriFone and the "untested and unproven Ingenico/Hypercom hybrid products."
On May 13, ViVOtech, a California near field communication (NFC) software and systems company, issued a press release reminding the DOJ and other interested parties it offered to buy Hypercom's U.S. assets March 31 – three days before VeriFone announced it would sell those assets to Ingenico.
"We totally understand the DOJ's concerns, because the cozy deal would essentially create a collaborative duopoly in this competitive market inhibiting choice and innovation, just as the NFC mobile commerce market is on the cusp of becoming reality," ViVOtech CEO Michael (Mick) Mullagh stated.
ViVOtech said the issue is what role it will play in introducing NFC mobile commerce technology. Mullagh pointed out that mobile commerce technology allows consumers to use mobile phones to make payments, receive real-time marketing offers, and to participate in merchandising and loyalty programs right at POS terminals.
"We still see the acquisition of Hypercom's U.S. assets as a strategic and transformative opportunity for our company to enhance next-generation NFC platforms and accelerate the adoption of in-store mobile payment, loyalty, marketing and merchandising solutions in the U.S." Mullagh said. "We are also the company that is in the best position to support and provide continuity to Hypercom's customers and to become a strong, viable third competitor maintaining a highly competitive market."
The complaint accuses the three companies of attempting to avoid pre-merger notification requirements through their agreement terms. Simply put, because Hypercom would no longer have U.S. assets it would not have to comply with statutory regulations. Also, the $54 million fee Ingenico would pay to license Hypercom's U.S. assets and the $15 million Ingenico would pay to Hypercom for technical support both fall below reporting thresholds, meaning the companies do not have to submit information about the impact of the agreement on competition in the POS terminal sales industry.
"The defendants have informed the United States that they will not fully comply with the document and information requests," the DOJ's complaint alleges. The government wants the court to stop the deals from moving forward "to protect consumers throughout the United States from the cooperative duopoly VeriFone and Ingenico seek to create."
The government indicated another drawback of these agreements is that the POS terminal market already discourages new competitors with its high barriers to entry. These barriers include the need for certifications, more intense regulation of the card industry, and the ability to have scale, proximity and a portfolio of customer applications. In addition, the government stated two primary barriers to market entry are developing a reputation and creating a proven track record of success serving customers.
According to the complaint, customers want to work with processors that know their business. "Customers are reluctant to entrust their sales process to a company without the proven ability to operate in their type of environment, especially since service and software maintenance are critical factors in the decision making process," the complaint states. "Certification is costly and time-consuming, and payment processors are unlikely to prioritize the terminals of a new company with no committed customers. Without this certification, it is very difficult for a producer to sell a significant number of … POS terminals."
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