HP now an e-commerce power

Call it a one-two punch.

Hewlett-Packard's (HWP) $1.18 billion acquisition of VeriFone (VFI) will give the computer giant large, immediate entry into the Internet commerce arena and will establish it as a formidable competitor to IBM (IBM) in selling to financial services firms.

Hewlett-Packard's surprise acquisition of the payments infrastructure company is likely to change the way the game is played.

HP, which has only dabbled in Internet commerce, is teaming up with VeriFone, by far the largest online payments technology player. HP's financial resources of $38.4 billion in annual revenues will bolster VeriFone's pittance of $437 million per annum; the combined financial and technical resources of the companies threaten to overwhelm other players in the Net payment space.

But not Big Blue. Selling to banks and financial services firms is IBM's largest vertical market, according to Karl Salnoske, general manager of IBMs Internet applications unit. VeriFone, which targets both merchants and banks, is both an IBM competitor in that market and a sometime partner for its countertop machines to authorize credit card payments.

Analysts say the acquisition gives HP capabilities to rival IBM's efforts in the Internet commerce space.

"IBM is the only other player I know of that has all the components [for Internet commerce] in place, but IBM is concentrating on the corporate buyers," said Barbara Ells, analyst with Zona Research. "It looks like Microsoft and HP are focusing on smaller enterprises."

IBM's Salnoske noted approvingly that HP had specifically mentioned its interest in secure credit card transactions over the Net in its announcement.

"It's one more vote for standards in the payment space, obviously something we are involved in," he said, mentioning the Visa-Mastercard Secure Electronic Transactions protocol, or SET.

"As other companies wake up to Internet payments, we'll see lots of competition in the market, but we feel pretty comfortable in that we got out in front of the curve on this one," Salnoske added. He also chided VeriFone for being behind in delivering SET software for a number of trials in which they are joint suppliers with IBM.

"We're still waiting for VeriFone to deliver their product to get on with those trials. Hopefully the acquisition will move [SET software] to the top of the priority stack," the IBMer added.

HP is a key ally of Microsoft, a longtime IBM adversary. Microsoft is also building VeriFone's merchant "cash register" into Microsoft's Merchant Server software. The cash register software allows Web storefronts to accept payments.

But Allen Weiner of Dataquest, who agrees that HP is challenging IBM with the VeriFone deal, sees several weaknesses in HP's e-commerce offerings.

"If you're going to do electronic commerce, you just can't do it only in the business-to-consumer area. It needs to be in business-to-business too," Weiner said. He views HP as weak in electronic data interchange, or EDI, a common means for big companies to order from their suppliers directly from computer to computer, without human intervention.

"The missing link is EDI, and that will necessitate another partner," said Weiner. He mentioned EDI firms Harbinger and Sterling Commerce, as potential EDI partners or, in Harbinger's case, a potential acquisition.

Despite HP's close ties to Netscape Communications, Weiner doesn't think HP will link up with Actra Business Systems, Netscape's e-commerce joint venture GE Information Systems. GEIS is the world's largest EDI player, but Weiner doesn't think Actra is far enough along.

Weiner noted HP also lacks e-commerce server software, application development tools, and online cataloging software.

"My hunch is that there will be a number of partners announced, and we will see Microsoft fit into the equation," Weiner said.

Meanwhile, VeriFone's chief rival in the Internet payments arena has been CyberCash. VeriFone was an early investor and still owns a 10 percent stake. Bill Melton, CyberCash chairman and cofounder, also founded VeriFone.

"VeriFone already has its foot on most of its competitors anyway," said Scott Smith, director of digital commerce research at Jupiter Communications.

Melton applauded the HP-VeriFone deal, saying HP's emphasis on e-commerce is likely to stimulate the industry.

"Verifone is a damn good high-volume, low-cost manufacturing operation that understands the banking industry," said Melton, who noted that VeriFone has no announced initiatives in electronic cash, electronic checks, or other forms of online payments.

HP and VeriFone, which are expanding their software and services portfolios, have recently bet big on smart cards--a chip-embedded device the size of a credit card that stores data. VeriFone envisions smart cards being used for electronic cash, while HP views the devices as ideal for security purposes.

"There's going to be big money in fighting over smart cards and standards," Melton added.

VeriFone already controls about 60 percent of the market for retail counter-top devices used to verify credit card purchases. The company has also been trying to move its relationships with banks and merchants onto the Internet.

"The HP/VeriFone nexus is truly a formidable power, even against service providers like First Data, Visa, MasterCard, and its Mondex smart card unit," said Torrey Byles, e-commerce analyst at Giga Information Group.

Based on size alone, the combined company has the clout to influence--if not dictate--technology standards, although Byles said that has not been HP's style.

The VeriFone acquisition was HP's biggest ever, but likely not its last in the Internet arena--or so hinted Rich Belluzzo, HP's No. 2 executive. HP, which has tended to grow its own technology rather than buy it, may use acquisitions to speed its entry into the Internet market, Belluzzo suggested.

Prior to the VeriFone deal, HP's biggest acquisition had been the $450 million it paid in 1989 for workstation manufacturer Apollo Computer. In 1995, it spent $250 million for Convex Computer, a supercomputer company in the technical and scientific markets.

In February 1996, HP bought security technology and 40 security programmers from SecureWare for an undisclosed amount. That technology, now called Virtual Vault, is a key element of HP's Internet security offerings.

In June 1996, HP made a minority equity investment in Business@Web, an Internet business-application development firm now called OneWave.

Other e-commerce industry watchers acknowledge the combined VeriFone-HP may hurt smaller players vying for merchants interested in Internet commerce.

"HP is a global player and can bring more resources to the table than VeriFone could itself," said Steve Mott, MasterCard's top e-commerce executive and its point man on the Secure Electronic Transactions (SET) credit-card protocol front.

However, the acquisition may boost overall Internet commerce, he said.

The acquisition gives HP a quick start in the Internet commerce market, which is expected to explode dramatically in the coming years and could trigger similar moves by rivals targeting the same space. Ironically, VeriFone bought its way into the Internet commerce market in August 1995 by acquiring Enterprise Integration Technologies, an Internet software and services firm, for $28 million.

Reuters contributed to this report.