Will VeriFone's $1 Billion Acquisition Pay Off?

VeriFone is trading up more than 5% this afternoon on the news that it will acquire Northern Europe's largest provider of payment and gateway services.

According to VeriFone's own release, the company will spend approximately €600 million to acquire all of the equity of Point, a provider of multichannel electronic payment solutions in Europe that focuses on payment services to merchants. At closing, VeriFone says that it will retire existing Point debt of approximately €170 million. In U.S. dollars, that's over $1 billion.

VeriFone hopes to use this acquisition to expand its business and eventually become the “world's largest infrastructure for rapid deployment of alternative payments.”

Not surprisingly, VeriFone's CEO, Douglas G. Bergeron, is delighted by today's announcement. “For the past two years, we have been transforming our business to respond to the rapidly evolving needs of consumers, retailers, and payment innovators worldwide,” he boasted in a press release. “Our vision is to offer retailers everywhere a managed service to easily accept all existing payment types, including the evolving alternative and mobile payment methods being offered by Google (NASDAQ: GOOG), PayPal, Groupon, Isis, Visa (NYSE: V), MasterCard (NYSE: MA), and American Express (NYSE: AXP). At the same time, we can increasingly offer the new payment entrants easy and accelerated access to our worldwide installation of more than 20 million merchant lanes.”

VeriFone believes that the acquisition should close by the end of 2011. It is expected to be accretive to non-GAAP earnings “by $0.08 to $0.10 per fully diluted share in fiscal 2012 and $0.30 to $0.35 in fiscal 2013.”

Established in 1988 and based in Stockholm, Point has operations in 11 Northern European countries and currently serves a network with nearly 475,000 contracts. More significantly, Point has “enjoyed nearly a decade of consistent double-digit revenue growth, expanding margins, and impressive product innovation.”

“We are committed to maintaining the high growth and entrepreneurial culture that has driven our success over the past two decades,” said Point CEO Johan Tjärnberg. “We have known and worked with VeriFone for 20 years and their fast-paced culture is the Point culture.”

This all sounds great on paper, but will the acquisition pay off? Corporations love to invest in and wholly acquire new businesses in order to expand or improve their own market. But while there are instances where this can be beneficial (ex: Bank of America (NYSE: BAC) gained more than 400 new branches and entered new markets by acquiring LaSalle Bank Corp.), there are many times when they prove to be a disaster. Hewlett-Packard (NYSE: HPQ) and Compaq, anyone? Hewlett-Packard also once owned VeriFone. Not surprisingly, that relationship didn't last very long.

Under its current chain of management, Point has been doing very well. And while Tjärnberg insists that the VeriFone culture is in line with Point's own culture, there is no doubt that the new owners will bring a few changes. Whether those changes will be better or worse for Point remains to be seen.

Like it or not, VeriFone has been on a bit of a shopping spree this month. On November 1, the company announced that it had acquired Global Bay Mobile Technologies.

Companies who go on a shopping spree tend to be desperate for growth, fearful of the competition, or overflowing with cash they don't know how to spend. Whatever the case is here, investors should keep a close eye on VeriFone's managers, watching for both future acquisitions and any changes – positive or negative.

ACTION ITEMS:

Bullish:

If you think that VeriFone is making the right decision in acquiring Point and Global Bay Mobile Technologies, consider the following trades:

• VeriFone wants to play nice with everyone, including Google, Visa, MasterCard, and American Express. Thus, VeriFone could mutually benefit from any one (or all) of these companies.
• Hewlett-Packard still sells VeriFone point of sale terminals, which means that the computer maker could also benefit from VeriFone's success.

Bearish:

Are you concerned that VeriFone is spending too much? Are you afraid that these acquisitions could backfire (as VeriFone did when Hewlett-Packard bought the firm)? If so, consider these alternatives:

• ACI Worldwide (NASDAQ: ACIW), one of VeriFone's leading competitors, would love to see VeriFone stumble.
• PAR Technology (NYSE: PAR), which is trading up slightly this afternoon, could grow its business if VeriFone were to take a hit.
• Finally we have JDA Software Group (NASDAQ: JDAS), which isn't as much of a direct competitor to VeriFone, but it is attempting to fill many retailer needs. Could it take the place of VeriFone if that company fails?

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