L-1 Identity Solutions [ID] recently said it has agreed to acquire the ID Systems business of Digimarc Corp. [DMRC] for $250 million in stock and cash in a deal that would give L-1 the vast majority of the drivers’ license market and new capabilities in card production.
Despite the fact that a combination between the two businesses would dominate over 90 percent of the market, executives from both companies believe that ultimately there will be no anti-trust concerns.
Drivers’ licenses are just one niche of a much larger identity management market that includes a variety of applications such as federal and port worker credentials, Bruce Davis, chairman and CEO of Digimarc, told sister publication Defense Daily.
Robert LaPenta, L-1’s chairman and CEO, said he believes the Justice Department won’t look at the share of the drivers’ license market his company would have following the acquisition but rather what the barriers to market entry are and what the competitive landscape looks like. He said the entry barriers are “not large,” adding that with the federal requirements pushing states to adopt more secure drivers’ licenses and processes for obtaining those licenses, “we expect it to be a very competitive environment.”
Indeed, larger integrators like Accenture [ACN] and BearingPoint [BE] have been competing to provide drivers’ licenses services to states, Stanford Group analyst Jeremy Grant, said in a note to clients.
Grant and Stephens, Inc., analyst Tim Quillin believe federal regulators may scrutinize the deal given the near monopoly the L-1, Digimarc combination would have on the drivers license market. However, Grant thinks the acquisition will be permitted but cautions that any pushback could come from the states.
Digimarc provides contracting services, which includes centralized card production capabilities, to 32 states for their drivers’ license enrollment and issuance process while L-1 has 14 states under contract for drivers’ license services. However, while Digimarc provides centralized card production, L-1 provides over-the-counter card issuance, which allows state motor vehicle departments to issue a license at their respective facilities.
To help it with its secure drivers’ license enrollment and issuance, Digimarc typically has to rely on products and services from other vendors when it comes to biometric capture and document authentication, areas where L-1 has strong capabilities.
Davis said that more of his company’s customers are looking for a single vendor that can provide a turnkey solution, which is then more efficient and secure.
Digimarc’s ID Systems business had about $97 million in sales last year. The company doesn’t break its sales out further, but most of the ID business is from the drivers’ license market. Still, Digimarc produces credentials for other customers. The company recently won a contract renewal from Mexico to produce tens of millions of voter identification credentials and it also provides secure identification solutions to several other countries in Latin America and the Caribbean.
LaPenta said Digimarc’s card production capabilities and international relationships will help take L-1 to another level when competing for national ID programs.
“One of the problems we’ve had is we’ve had to outsource a lot of what we provided in these applications,” LaPenta said. “Now we basically can provide everything in house.”
The rest of the Digimarc’s sales, about $13 million, relates to its digital watermarking technology. Digimarc plans to spin off its digital watermarking business into a new Digimarc company, which L-1 plans to invest $5 million into as part of the transaction.
Digital watermarking technology is basically “imperceptible” data that’s embedded into digital coding, making it harder to counterfeit money or easier to track the use of audio and video documents.
Terms of the deal call for a 50-50 split between cash and stock. In addition to the $5 million investment in Digimarc’s digital watermarking business, L-1 will use $120 million in cash. The number of L-1 shares to be issued will be based on the average closing price of the stock during a period prior to closing.
The transaction is expected to close in the second half of 2008. If the deal is approved by federal regulators and Digimarc’s shareholders, L-1 expects its pro forma 2008 sales to be about $670 million. L-1 also said it expects the deal to be accretive to earnings and said its backlog would grow to $1 billion.
Davis said that the agreement with L-1 wasn’t arrived at through an auction process. Imperial Capital is acting as Digimarc’s financial adviser.