Hypercom Corporation

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Hypercom Corporation

2851 W. Kathleen Road
Phoenix, Arizona 85023
U.S.A.
(602) 504-5000
Fax: (602) 866-5380
Web site: http://www.hypercom.com

Public Company
Incorporated: 1978
Employees: 1,166
Sales: $257.2 million (1998)
Stock Exchanges: New York
Ticker Symbol: HYC
SICs: 3575 Computer Terminals; 3571 Electronic Computers

A leader in its field, Hypercom Corporation develops, manufactures, and markets electronic payment hardware and software for major corporations, retailers, and financial institutions. An early competitor in the electronic payments industry, Hypercom originated as an Australian company, supplying customers with point-of sales terminals that authorized credit card and debit card transactions. In 1992, after moving its headquarters to the United States four years earlier, the company began providing networking products for electronic payment systems through its Hypercom Network Systems division. Growth for the company came quickly during the 1990s, as Hypercom chased its only rival, industry leader VeriFone, Inc., seeking to win the global race for domination in the electronic payments industry. Hypercom chipped away at VeriFone’s lead during the early and mid-1990s, strengthening its domestic presence while it expanded on the international front. In 1997, the company made its debut on the New York Stock Exchange and introduced a line of Internet electronic commerce products. Majority-owned by its founder, George Wallner, Hypercom distributed its products in more than 50 countries, occupying a commanding position in Latin America and the Asia/Pacific region.

Australian Origins

Hypercom’s founder, George Wallner, was born in Hungary, where he studied electrical and communications engineering. Wallner put his educational training to work when he moved to Australia in 1973. For five years, Wallner strove to develop large telephone systems and data collection networks; then in 1978 he hatched an entrepreneurial plan in the kitchen of the Sydney apartment he shared with his brother Paul. The Wallner brothers were, according to George, “just engineers playing with technology,” but the pair soon created a viable business by developing systems to deliver credit card authorizations to merchant terminals at high speed. Hypercom was the result of their efforts, a pioneer company in the nascent and soon to burgeon electronic payments industry.

Point-of-sale (POS) systems that enabled card-based, electronic payments were introduced in the early 1980s to accommodate consumer preferences for using credit and debit cards instead of cash or checks. Prior to the development of automated POS systems, card-based transactions generally were processed manually, using paper-based systems to obtain authorization from card-issuing banks. As the volume of credit and debit card transactions increased, however, a more sophisticated method of authorization was needed. Banks, with the backing of VISA and MasterCard, offered financial incentives to promote the development and use of POS-related technologies, which spawned the creation of electronic payment systems that improved accuracy, reduced costs, increased efficiency, and reduced credit card abuse and fraud. In the United States, one company in particular achieved prominence in the fast-growing industry, Redwood City, California-based VeriFone, Inc. Wallner, meanwhile, achieved his initial technical advances in Australia. As the electronic payment industry grew rapidly during the 1980s, maturing into an indispensable facet of modern commerce, the two companies eventually confronted one another on VeriFone’s home turf in the United States.

Before Hypercom and VeriFone began their head-to-head battle, the two companies were distant competitors, operating in entirely different regions. Wallner used Hypercom’s business in Australia as a springboard for the company’s expansion throughout the Asia/Pacific region, providing hardware and software for banks, retailers, credit-card companies, and other businesses with transaction-processing needs. As Hypercom grew, it did so with a technology obdurately embraced by Wallner. Based on synchronous data-link control protocols rather than character-by-character asynchronous communication, Hypercom’s technology was relatively common outside the United States, but in the United States the technology was unique. According to the company’s claims, synchronous technology enabled POS systems to transmit data more quickly and more reliably than asynchronous technology, and at a lower cost, but the advantages did not necessarily translate into great demand. Although there was widespread agreement that the synchronous approach was superior in several important respects, many users were satisfied with existing systems and could not be persuaded to adopt a different technology. “There’s something to what they have,” one of Hypercom’s competitors conceded, “but none of our customers have asked for it.” Wallner, however, refused to bow to what the market demanded, becoming, as one colleague remarked, “the keeper of the dream,” convinced that the benefits of synchronous technology would eventually win the business of enlightened customers. It was only a matter of time, he believed, until the volume of the electronic payment transactions necessitated the widespread adoption of faster, cheaper POS technology.

By the mid-1980s, Wallner had entrenched his position in markets scattered throughout the Asia/Pacific region. Hypercom, by this point, ranked as the largest supplier of POS equipment in the region, operating in 18 countries. Despite the company’s preeminent market position, annual sales were a modest $5 million, held in check by the equally modest size of the electronic payments industry. Rampant growth had not yet arrived, but the industry would begin to expand beyond its initial card-acceptance base during the late 1980s and finally record explosive growth during the early 1990s. As this monumental upswing in growth was beginning, Wallner made his first move into the United States, positioning his company in VeriFone’s domain just as the electronic payments industry reached a turning point in its brief history. Hypercom signed on American Express Company as a customer in 1986, entered the U.S. market the following year, and relocated its worldwide headquarters in Phoenix, Arizona, in 1988 to be closer to American Express. By this point Hypercom’s systems were delivering six-second transactions, far faster than the 12- to 17-second transactions averaged by other POS systems, but it was at this juncture that Hypercom’s synchronous technology met with tepid response from POS customers. Although the faster transmission rates sounded good, they were not yet a necessity and, accordingly, did not make Hypercom’s penetration of the U.S. market any easier. Nevertheless, the company secured substantial, important business during the late 1980s, winning customers such as Citibank, Texaco, Smitty’s, and Valley National Bank.

Rapid Industry Growth Touched Off in the 1990s

By the beginning of the 1990s, conditions were prime for the explosive growth of the electronic payments industry. Credit-and debit-card usage began to greatly increase at new locations, such as supermarkets, as the variety of electronic payment methods and programs proliferated. Consumers became increasingly dependent on the magnetic stripe on their cards for everyday purchases, and the systems that handled electronic authorization, data capture, and transaction transmission and settlement consequently needed to become more sophisticated to cope with the heavy traffic. As this decade of vibrant growth began, Hypercom, according to the industry publication POS News, ranked third in U.S. shipments of POS equipment, controlling a 9.7 percent share of the market in the 1990s. VeriFone, by contrast, was well in the lead, controlling 62 percent of the U.S. market and collecting annual sales of $155 million, compared to the $40 million generated by Hypercom.

The gap separating Hypercom and VeriFone narrowed during the first half of the 1990s, while the rest of the competitors in the field receded into the distance, essentially leaving Wallner and VeriFone’s chief executive, Hatim Tyabji, to battle for industry supremacy. As Hypercom’s annual sales began to grow robustly, the company diversified the services it offered to customers. In 1992, Hypercom Network Systems, headed by Paul Wallner, was formed to develop networking products for electronic payment systems and to develop such products for other networking markets. It served as the company’s telecommunications unit, a lower-profile segment of the company’s business that provided cost-efficient voice and data telecommunications for Wells Fargo Bank’s branch system, the 1,500 store network of Home Depot, and other customers, expanding beyond Hypercom’s original business of supplying POS equipment and related services. In the same year Hypercom Network Systems made its debut, Wallner hired Albert Irato as Hypercom’s president and chief executive officer, gaining the talents of an individual described as “a pioneer in the development of U.S. credit card authorization systems.” Previously a senior vice-president at American Express, Irato had been responsible for merchant and automated teller machine networks for the giant credit card company.

Annual sales eclipsed the $100 million mark in 1993, the same year Hypercom tripled the manufacturing, marketing, research and development, and administrative space at its headquarters in Phoenix. The expansion, coupled with an increase in manufacturing capacity in Australia, helped fuel a 36 percent increase in shipments in 1994. With the gains achieved that year, Hypercom increased its market share to 17 percent, still well below the 59 percent commanded by VeriFone, but substantial progress nonetheless. Said Irato, “We are shipping 30 percent to 35 percent of new devices in the U.S. market. That tells me we have to be taking share away from VeriFone.” Although the U.S. market accounted for the majority of Hypercom’s sales by the mid-1990s, contributing mightily to the 20-fold increase in the company’s revenue volume since it had first entered the U.S. market, international business was undeniably important, representing roughly 40 percent of the Phoenix-based firm’s total sales. With Irato installed as president and chief executive officer, Wallner, as chairman, presided over this aspect of Hypercom’s operations, overseeing the company’s international activities.

Overseas Growth in the Mid-1990s

As annual sales eclipsed $200 million in 1995—twice the total recorded two years earlier—Wallner intensified Hypercom’s foreign expansion. In January 1995, the company established a presence in Santiago, Chile, with the formation of Hypercom de Chile. The organization of the subsidiary followed an agreement with Transbank, Chile’s largest credit card transaction processor, to provide POS terminals and an electronic payment network for 19 cities. Six months later, the company established a subsidiary office in Budapest to serve emerging markets in eastern Europe and opened a second office in London to bolster its business with European Union markets. In April 1996, the company formed Hypercom International as a subsidiary to coordinate global strategic planning and to help tailor POS equipment and networking products and the marketing of such products to different economies, political systems, and cultures. Several months later, a subsidiary in Buenos Aires was opened. By the end of 1996, the emphasis on international expansion had created substantial leads for Hypercom over VeriFone in two, fast-growing regions. In the Asia/Pacific region, Hypercom controlled 29 percent of the market, compared to 16 percent for VeriFone, and in Latin America it controlled 54 percent of the market, compared to 37 percent for VeriFone.

The attention awarded the race between Hypercom and VeriFone stemmed, in part, from the fact that there were no other competitors close on their heels. The two companies had the global market largely to themselves, and, accordingly, all eyes were drawn to the heated battle between number one and number two. There were, however, important distinctions between the two companies, distinctions that Hypercom officials were quick to expose. Aside from collecting nearly twice the revenues of Hypercom and having an employee base four times larger than Hypercom, VeriFone had diversified into a number of different business areas, including expanding its operational scope to include Internet commerce. Wallner professed no interest in following suit, declaring in late 1996,’ This is not the time to be going off into cyberspace.” Further, VeriFone was publicly held, while Hypercom prided itself on remaining a privately owned concern. Said Irato, “We can move more quickly and make significant investments in our future without worrying all the time about what the shareholders would say.” In 1997, however, the distinctions became subtler and the battle between the companies became more difficult to follow.

In mid-1997, Hewlett-Packard Company acquired VeriFone in a $1.2 billion transaction. Following VeriFone’s absorption into the vast structure of its new parent company, financial figures and other yardstick results were consolidated into Hewlett-Packard, making the head-on competition with Hypercom more difficult to follow. Also in 1997, Hypercom converted to public ownership, filing for an initial public offering (IPO) after VeriFone had been acquired by Hewlett-Packard. In November 1997, Hypercom’s IPO raised $180 million. The company planned to use the proceeds to repay $21 million of debt and to fund $20 million of facility expansion, with the balance set aside for research and development and the possibility of future acquisitions. The same year that Hypercom debuted on the New York Stock Exchange, it also entered the Internet commerce business, only several months after Wallner had disparaged such a move. Hypercom’s line of Internet commerce products was based on Secure Electronics Transaction (SET) technology, a standard supported by VISA, MasterCard, IBM, GTE, Microsoft, and Netscape.

Although the Asian economic crisis delivered a palpable blow to Hypercom in 1998, particularly affecting its Hypercom Network Systems business group, the company’s first year as a publicly traded concern was positive. With the proceeds obtained from its IPO, Hypercom completed two small acquisitions during the year, purchasing companies that distributed Hypercom equipment in both transactions. In April, the company reached an agreement to acquire the Australian operations of its distributor, Advantage Group Ltd., for $1.5 million. In November, Hypercom acquired Horizon Group Inc., a U.S. distributor of POS equipment with $24 million in annual sales. Looking ahead, Hypercom was intent on remaining focused on POS equipment, as VeriFone pushed deeper into Internet commerce. In late 1998, VeriFone controlled 45 percent of the market for POS terminals, compared to the 15 percent controlled by Hypercom, but continued growth by Hypercom promised to narrow the gap. To fuel this expected growth, the company had a new generation of POS payment systems—its Interactive Customer Equipment line—that employed new modem technology called FastPOS. Capable of providing faster transactions and reading personal signatures, the new technology instilled confidence that the company’s 20th anniversary would be a springboard for future growth.

Principal Subsidiaries

Hypercom (Arizona), Inc.; Hypercom U.S.A., Inc.; Hypercom Latino America, Inc.; Hypercom Manufacturing Resources, Inc.; Hypercom do Brasil Industria e Comercio Limitada (Brazil); Hypercom Asia Ltd. (Hong Kong); Hypercom Australia Pty., Ltd.; Hypercom Europe, Inc.; Hypercom FSC, Inc. (Barbados); Hypercom Financial, Inc.; Hypercom Net Transactions, Pty., Ltd. (Australia); Hypercom Hungary KFT; Hypercom Network Systems Ltd. (Hong Kong); Hypercom Far East, Ltd. (Hong Kong); Hypercom Asia (Singapore) Pte Ltd.; Hypercom Canada Ltd.; Hypercom de Mexico; Hypercom de Argentina; Hypercom de Chile, S.A.; Hypercom de Venezuela.