When Biometrics firms collide: $44m consolidation deal

Thursday, January 10, 2008

STAMFORD, Conn.—L-1 Identity Solutions, a rapidly growing company in the biometrics space, in early January came to definitive agreement with Bioscrypt, the market leader in physical access control biometrics, to purchase the company for roughly $44 million. In an all-stock transaction, L-1 will pay the equivalent of $.55 per Bioscrypt share, based on the average closing price of L-1 stock for the 20 trading days leading up to the deal’s close. The purchase price represents a more than 55 percent premium on the $.36 per share trading price of Bioscrpyt on the day before the deal’s announcement. The close is subject to regulatory approval.
Doni Fordyce, L-1’s executive vice president, corporate communications, said Bioscrypt, which will operate as a wholly-owned subsidiary, fills one of the few holes in L-1’s biometric portfolio: physical access control. “We have tremendous capabilities in capturing the biometrics and using software to access and manage databases” on the logical access side, she said, “but we don’t have anything in physical access right now. The hardware and software they use is just not an area we’re in ... It opens a tremendous new market for us.”
In some ways, this was by design, said Joseph Atick, L-1’s executive vice president and chief strategic officer, who came to L-1 through its acquisition of Identix, which he built as chief executive officer. While running Identix, he said, “I made a conscious decision to get out of [the physical access market] because I felt I couldn’t compete against Bioscrypt at that time. So there’s a clean complementarity because we focused more on knowledge discovery and biometric enrollment, a complementary space to Bioscrypt’s. There isn’t any overlap and now we bring together the best of breed in both areas. I don’t regret the decision of having focused Identix into a complementary area.”
Atick isn’t concerned, either, with Bioscrpyt’s recent financial performance. The company brought in $5.2 million in revenues for the quarter ending Sept. 31, 2007, while recording a net loss of more than $10 million over the first nine months of the year, despite its market-leading status. Both Atick and Bioscrpyt chief executive officer Robert Douglas said this deal should alleviate any fears that dealer partners may have had about Bioscrypt’s long-term viability.
“The access control market is about trust and reliabilty,” Atick said. “You want to know that the company behind a product is able to sustain itself in that marketplace. Having the L-1 brand behind Bioscrypt takes the issue of survivability off the table, and nobody’s going to be fired for investing in a Bioscrypt solution ... Now, not only is this a good product, but this is a very good company that will stand behind you.”
Atick said applying Bioscrypt’s technology to other areas of L-1 will allow the company to diversify and will make the deal revenue neutral for L-1 in 2008, despite Bioscrypt’s recent losses. “When they are unable to diversify,” he said, “they face a problem and the challenge is that they spend 30 percent of their revenue on R&D, so we’ll be able to leverage some of the talent that Bioscrypt has into other L-1 divisions, which takes the burden off Bioscrypt.”
“We’re a market leader in the physical access control segment,” said Douglas, “and logical access control is going well, as well, but you need to be a profitable business to stick around in the long term.”
Is L-1 profitable? In the recent past, yes. The company has posted EBITDA of $44 million over the last 12 reported months, but posted a net loss of about $6 million, about $.09 per share. However, L-1 reported a $1.5 million net income for the three months prior to Sept. 30, 2007. L-1 also carries about $275 million in debt, with roughly $11 million in cash.
An interesting side-note to the deal are former A4Vision stockholders. When they received Bioscrypt stock as part of a $9 million acquisition in early 2007, it was trading at $.98. Down to $.36, the value they received had been cut by nearly two-thirds. Now, they’ve realized just a 45-percent loss of value in getting $.55 a share, but they will be owners of far fewer shares of L-1 stock, which traded at roughly $17 on the day of the announcement.