An Investor Letter Sparks a Tussle Between the Terminal Kingpins

A letter from a major Hypercom Corp. investor to the point-of-sale terminal maker's chief executive advising a stock buyback and referring to a possible sale of the company, made public Friday in a Securities & Exchange Commission filing, has prompted rival VeriFone Holdings Inc. to target Hypercom customers with an offer to convert their systems to VeriFone at no cost. VeriFone, which says it is prepared to make a multimillion-dollar investment in the offer, says the investor's letter throws into relief questions about Hypercom's ability to compete long-term. “Our regional managers have been getting inquiries from [Hypercom] customers wondering where they are going to get future product from,” says a VeriFone spokesman. A Hypercom spokesman says its customers are satisfied with its products and its commitment to the terminal market. “We're a lot closer to our customers than [VeriFone is], and they aren't concerned,” says the Hypercom spokesman. VeriFone's offer, he says, is a “desperate act” from a competitor from whom Hypercom has been taking market share lately. San Jose, Calif.-based VeriFone on Monday said it would allow Hypercom customers around the world to convert “all currently operational Hypercom customer applications and network interfaces” to VeriFone platforms at no cost. The offer is good until the end of July. In a statement, Douglas G. Bergeron, VeriFone's chairman and chief executive, says “many” Hypercom customers are “concerned about the company's future and speculation about a possible sale.” VeriFone says Hypercom customers are also looking to a Jan. 1 deadline, set by the card companies that back the Payment Card Industry (PCI) security requirements, after which terminal makers can no longer market equipment that doesn't meet PCI standards for PIN-entry devices. “Many of Hypercom's existing products are not PCI-compliant and cannot be sold after the end of this calendar year,” Bergeron says in the statement. The VeriFone spokesman says this raises concerns among banks and merchants about their ability to replace existing equipment. “They'll be in a bind,” he says. “We'd rather deal with [conversions from Hypercom] in a managed way rather than try to do it on Dec. 1.” “Most of our products are PCI compliant,” says the Hypercom spokesman, dismissing VeriFone's claim. “We're not concerned about that [Jan. 1 deadline].” Indeed, he adds, Hypercom plans by mid-year to introduce six new high-memory, PCI-compliant countertop terminal models. These new products, he says, may be worrying VeriFone, which he says could be trying to pre-empt customers before the new devices come out. The competitive tussle between these two terminal kingpins was sparked by a letter that came to light Friday in which Robert L. Rosen, managing partner of Hypercom investor RLR Capital Partners LP, urges the company to buy back up to 18 million, or one-third, of its outstanding shares instead of pouring resources into acquisitions. The letter, addressed to Daniel D. Diethelm, chairman of Hypercom, and William C. Keiper, chief executive, also recommends the company “conduct a review of strategic alternatives…including a possible sale” if it does not meet its targets for sales growth and operating margins by the end of the year. The letter is part of a Schedule 13D filing by New York-based RLR in which it disclosed that it now owns 2.7 million Hypercom shares, or about 5.1% of the outstanding stock. VeriFone, which last year acquired rival Lipman Electronics Engineering Ltd., reported a $984,000 loss in its quarter ended Jan. 31 on revenue of $216.6 million. For calendar 2006, it earned $59.5 million on revenue of $581.1 million. Phoenix-based Hypercom lost $2.74 million on $64.8 million in revenue in its quarter ended Dec. 31. For 2006, it earned $6.97 million on revenue of $248.6 million, compared to a $33.4 million loss in 2005. Its stock closed Monday at $5.36, down 12 cents for the day. VeriFone closed at $36.80, up $1.19.