On May 20, 2011, the DOJ announced that VeriFone Systems Inc.(“VeriFone”), Hypercom Corp. (“Hypercom”), and Ingenico S.A. (“Ingenico”) abandoned plans for Hypercom to divest its U.S. point-of-sale (“POS”) business to Ingenico as the Department of Justice (“DOJ”) did not find the divestiture adequate to resolve the competitive concerns raised by the VeriFone/Hypercom transaction.
The divestiture plan was abandoned only after the DOJ sued to block the transactions. VeriFone and Hypercom entered into an agreement with the DOJ to suspend the litigation filed against the parties in order to explore various options for the planned divestiture of Hypercom's U.S. business, including the possibility of a divestiture to an alternative buyer. Ingenico was dropped from the lawsuit.
VeriFone agreed to purchase Hypercom in a $485 million deal in November of last year. The acquisition would combine two of three significant sellers of countertop POS terminals in the United States and the largest and third-largest sellers of multi-lane POS terminals in the United States.
The parties to the acquisition foresaw the anticompetitive nature of their deal and decided to divest Hypercom's U.S. business in connection with the acquisition in an attempt to address the antitrust issues raised. They did so, however, without the DOJ's consent. On April 1, 2011, VeriFone and Hypercom entered into an agreement whereby Hypercom's U.S. business would be “divested” to Ingenico, the only other substantial seller of multi-lane POS terminals in the United States. In the DOJ's view, this divestiture was as anticompetitive or maybe even more anticompetitive than the current VeriFone deal to acquire Hypercom. The DOJ requested information and documents from VeriFone, Hypercom, and Ingenico. Allegedly, the three parties refused to provide information to the DOJ.
Accordingly, on May 10, 2011, the DOJ responded by filing a civil antitrust lawsuit to block the proposed acquisition and the proposed divestiture to Ingenico as it was deemed inadequate to satisfy the DOJ”s concerns. VeriFone and Hypercom thereafter gave up its divestment plans to Ingenico and are in discussion with the DOJ to identify alternative buyers that will be acceptable to DOJ's anticompetitive concerns.
The DOJ found that the proposed divestiture to Ingenico had two fundamental flaws as a remedy for the anticompetitive effects of the VeriFone/Hypercom transaction. First, licensing the assets to Ingenico fails to replicate the current three-way competition between VeriFone, Hypercom, and Ingenico in the multi-lane POS terminals market. Second, 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 in the relevant markets.
Although the transaction between VeriFone and Hypercom totaled $485 million, which exceeds the HRS threshold, in April, they structured the transaction in a way to avoid reporting the deal and the divestiture agreement under the HSR rules. Hypercom announced publicly in April that the value of the divestiture was under the HSR thresholds and that the agreement would close immediately prior to the closing of VeriFone's acquisition of Hypercom. The DOJ claims that the divestiture is really a franchise agreement and not an outright asset divestiture. These arrangements eliminated the need for VeriFone and Hypercom to file a pre-merger notification for the original acquisition as Hypercom would no longer have sufficient U.S. assets to meet the statutory requirements since those assets would have been transferred to Ingenico. The $54 million price that Ingenico would pay to license the Hypercom assets would be below the statutory reporting threshold of $66 million. By not needing to file a pre-merger notification, the statutory waiting periods did not apply. The DOJ tried to seek information from the parties, but the parties refused. Given that the waiting periods did not apply, VeriFone and Hypercom could have consummated the acquisition at any time. Therefore, the DOJ sued to block the transaction.
The lawsuit is noteworthy for several reasons. First, the DOJ's lawsuit against VeriFone, Hypercom, and Ingenico is not a surprise. Any time parties to a merger refuse to cooperate with the DOJ's investigation of a transaction and create their own fix to obvious competition problems without discussing them with the DOJ staff, a lawsuit should be expected. Second, the parties to these transactions took a confrontational approach with the DOJ and the DOJ demonstrated that it will not be pushed around by aggressive tactics. Third, most transactions like VeriFone's acquisition of Hypercom are very easy to resolve at the Antitrust Division as long as the parties are willing to cooperate with the government's investigation and negotiate a settlement in good faith. The litigation is currently on hold as the Antitrust Division and VeriFone try to work out a settlement.