The U.S. Department of Justice filed a civil antitrust lawsuit May 12 to block the proposed acquisition by VeriFone Systems Inc. (NYSE:PAY) of Hypercom Corp. (NYSE:HYC) The department said that the proposed deal would substantially lessen competition in the sale of point-of-sale (POS) terminals in the United States, resulting in higher prices and reduced innovation, quality, product variety, and service.

On Nov. 17, 2010, VeriFone, global leader in secure electronic payment solutions, agreed to purchase Hypercom in an all-stock transaction valued at approximately $485 million, including net debt assumed by VeriFone.

In an effort to resolve antitrust issues with the merger, Hypercom announced on April 4, 2011, that it had entered into an agreement to sell its U.S. business to Ingenico S.A. Hypercom said the transaction is expected to close immediately prior to completion of VeriFone's acquisition of Hypercom. The aggregate purchase price to be paid by Ingenico is $54 million in cash, subject to adjustments. In 2010, the Hypercom U.S. business included in the agreement achieved revenues of approximately $61 million. Following the completion of the merger, VeriFone will retain Hypercom's non-payment terminal Networking products operations in the U.S.

The department said that although VeriFone and Hypercom proposed a fix to resolve the antitrust concerns with the merger, it did not adequately resolve the competitive concerns. The department filed its lawsuit in U.S. District Court in Washington, D.C.

According to the Justice Department Ingenico is the largest provider of POS terminals worldwide and the only other significant competitor to VeriFone and Hypercom in the United States.

POS terminals are used by retailers and other firms to accept electronic payments such as credit cards and debit cards. VeriFone and Hypercom together control more than 60 percent of the U.S. market for the POS terminals used by the largest retailers. They are two of only three substantial sellers of other types of POS terminals.

According to the department's complaint, the planned sale of Hypercom's U.S. POS terminal business to Ingenico does not resolve the antitrust concerns raised by the VeriFone/Hypercom transaction because the assets are to be sold to another significant competitor in the market in a manner that does not create a new, independent, long-term competitor. In addition, the structure of the agreements between Ingenico and VeriFone, the only two significant POS sellers in the United States post-merger, enhances VeriFone and Ingenico's ability to coordinate pricing for all POS terminals.

"The combination of VeriFone and Hypercom would likely lead to retailers paying higher prices for POS terminals," said Christine Varney, Assistant Attorney General in charge of the Department of Justice's Antitrust Division. "The proposed divestiture does not resolve the significant competitive concerns posed by the merger, and in some ways exacerbates them."

Merger in second half of this year

In a joint statement commenting on the lawsuit, the two companies said, "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."

J.P. Morgan Securities LLC acted as VeriFone's exclusive financial advisor and UBS Securities was Hypercom's financial advisor in the deal. Sullivan & Cromwell LLP is acting as legal counsel for VeriFone and DLA Piper US LLP is acting as legal counsel for Hypercom.
News of the antitrust lawsuit pushed down the companies' share prices.

San Jose, Calif.-based VeriFone earned more than $1 billion in worldwide revenues in its last fiscal year, ending in October 2010. Alpharetta, Ga.-based Hypercom earned more than $450 million in worldwide revenues in 2010. Ingenico is a French corporation with worldwide revenues in 2010 of more than $1.3 billion.