Smart card market leaders Gemplus International SA and Axalto NV plan to merge and form what one skeptical observer called the ‘King Kong of the SIM card market’ with expected combined revenue this year of 1.8bn euros ($2.1bn).
The two companies have almost half the chip card market and Gemplus CEO Alex Mandl, a rare American at a French party, acknowledged that getting the deal approved by regulators would not be a slam dunk. They anticipate convincing EU competition authorities will be a lengthy process and do not see the merger closing until the summer of 2006.
Not only will the new company, given the unsavoury name Gemalto, dominate the market but its remaining competitors will trail far behind in its wake.
Their nearest competitor was Munich, Germany-based Giesecke & Devrient GmbH with 13.8%, Paris, France-based Oberthur Card Systems SA, with 6.2%, Paderborn, Germany-based Orga Kartensysteme GmbH with 3.7% and Incard SpA, an Italian subsidiary of chipmaker STMicroelectronics NV, with 3.1%.
More worrying for a company with a high cost French base has been the sudden emergence of Chinese entrants to the market. Eastcom Peace Smart Card Co, Datang Microelectronics Technology Co, WatchData System Co. and Wuhan Tianyu have all been grabbing market share in the world’s most buoyant telecoms market.
In response to the accusation that Gemalto would be the SIM card King Kong, Mandl insisted there was plenty of competition in the market. However with the competitors puny market shares, many would be reduced to second source status, licensing designs from a company whose R&D spend they can’t match.
Given that the smart card was invented in France 31 years ago, the players are all European. But further consolidation looks inevitable if a credible competitor to Gemalto is to emerge.
However, the company is calling itself a digital security vendor, suggesting ambitions way beyond the smart card market and authentification security specialist RSA Security Inc could find its market share under concerted attack.
The merger will be executed by an offer of two Axalto shares for every 25 Gemplus shares in an arrangement that will give Gemplus shareholders 55.4% of the combined Axalto shareholders holding the remaining 44.6%.
Two of Gemplus’ largest shareholders, Texas Pacific Group and the Quandt family entities, who own 43.7% of the total, have already accepted the deal. To sweeten the whole arrangement, cash-rich Gemplus is to distribute a special dividend worth 163m euros ($191.1m) to its investors.
This will still leave the combined group with $450m of cash and acquisition of companies, that will take Gemalto into related fields, is on the agenda.
To ensure a buoyant share price when the merger finally closes, Gemalto will immediately institute a buyback program covering up to 10% of its shares.
The deal is billed as a merger of equals. Gemplus CEO Mandl will become executive chairman and CEO Olivier Piou will be the CEO of Gemalto. Other top posts will also be shared out.
Gemalto, which will be registered in the Netherlands but operate from a Paris headquarters, will have an 11,000-strong workforce and operations in over 50 countries.
The two companies forecast synergies of 85m euros ($99.7m) by the third year after closing. Given French sensitivy about job losses, the they insist that they will not have to reduce headcount given a growing market, though it concedes some posts will go in duplicated departments such as finance.
One-time IT, relocation and other restructuring costs necessary to realize the synergies are expected to total approximately 43m ($50m).
A big justification for the deal is a combined R&D and sales & marketing operations will enable it to develop new markets and pursue high growth opportunities, such as identity, ePassport, healthcare, IT and corporate security, and payments.
Much of the synergies will come from increased scale, which it believes will lead to improved manufacturing processes and supply chain efficiencies, and greater ability to support client-dedicated projects.
Though SIM cards, and to a much lesser extend pre-paid phone cards, provide the bulk of revenue for both companies, the banking and identity and security markets have considerable growth potential.
Both company have a similar spread of incomes from the markets they serve with around 65% of sales from the telecoms sector, with 25% coming from banking and 10% from identity and security.
While the low end of the SIM card market has experienced brutal competition as it becomes increasingly commoditized, both companies sees bigger margins in high memory multimedia SIM cards as wireless carriers look to offer TV services on mobile devices. They also see opportunities in digital rights management as mobile device users look to download music to their combined phones and music players.