Smart cards may not be an IPO jewel December 07, 2000
Update: Gemplus International's IPO, originally expected to price Wednesday night, is now scheduled to price Thursday night for Friday trading.
Americans are perhaps the most stubborn people on the planet, especially when it comes to change. This mentality, coupled with the Nasdaq's recent bloodbath, could be enough to keep investors away from Gemplus International (Nasdaq: GEMP)'s $807.3 million IPO on Friday.
Although Gemenos, France-based Gemplus's smart-card technologies have gained traction in Europe, U.S. investors may be arrogant enough to snub technologies that weren't developed here. Despite the fact that it's been a month since we went to the polls and still don't have a president, Americans still see themselves as the global superpower -- especially when it comes to technology and innovation.
Even lead manager Credit Suisse First Boston has had difficulties marketing the offering, going so far as to lower the price range for the 78.5 million-share global offering to $9.86 to $10.72 from $12.35 to $14.05. Still, the more modest valuation seems likely to be a response to the dried-up IPO pipeline rather than an indication of concern over Gemplus's smart-card technology or its popularity in Europe. A total of 284 million smart cards were shipped in Europe in 1999, an increase of 44 percent over 1998. This total is expected to reach 610 million in 2000 and top 1 billion in the region by 2004, according to International Data Corporation.
WHAT'S SO SMART ABOUT IT?
Still, Gemplus's offering is expected to arouse some interest among investors who are willing to place a bet that this technology will (someday) find a foothold in the U.S. Gemplus's smart card, which is similar in some respects to the American Express Blue card, targets the wireless market by effectively transforming a wireless handset into a personalized mini-PC.
The chip supports basic voice and email messaging applications, but more importantly provides a secure platform for e-commerce activities by utilizing encrypted code that is embedded in the chip. Gemplus hopes to eliminate the need for every other credit card, bank card, airline frequent flyer number, or any other personalized information codes. By placing all this information on one chip, Gemplus believes there will no longer be a need for dozens of different codes, accounts, and passwords.
While this many sound like a pipe dream to Americans that are fond of their dozen credit cards and still like buying a Coke with cash, it's already happening in Europe. But as easy as it sounds, the U.S. is not Europe. Because of differences in consumer buying habits and infrastructure, analysts don't expect a smart-card system to catch on in the U.S. anytime soon.
Besides security concerns about placing so much critical and personal information on a single chip, the U.S. lacks a next-generation, uniform wireless infrastructure to support this technology. The real problem has been the inability of companies developing smart-card platforms to educate U.S. consumers, says Yves Siegel, an analyst with First Union Securities in New York.
As a result, a crowded market of competitors such as Visa and Mastercard have elected to put their smart-card initiatives on hold until there is a better indication of future adoption in areas such as banking, which has traditionally relied on the more cost-effective magnetic stripe cards as their principal technology. Moreover, relative to the U.S. market, European companies such as Gemplus have received government support in many European countries.
DON'T FEEL LONELY
But even still, Gemplus is not bearing all the risk. Despite the fact that the company accounted for 32.8 percent of overall global sales of chip cards in 1999, they were closely followed by the conglomerate Schlumberger Limited (NYSE: SLB), known more for its work in oil field services, at 27.4 percent; France's Oberthur Card Systems, with 8.9 percent; and Germany's Giesecke & Devrient and Orga, with 5.9 percent and 3.9 percent, respectively, according to IDC.
Yet despite the limited adoption of its technologies in the U.S., Gemplus has managed to attract a lot of attention from technological bellwethers stateside. The company has strategic agreements with the likes of Microsoft and Sun Microsystems on the operating system side; security providers Verisign and Certicom; wireless device makers Nokia, Ericsson, and Motorola; system integrators like IBM; chip makers Infineon and Philips; and wireless software infrastructure players such as Openwave (formerly Phone.com) and Aether Systems.
Investors should be further reassured that Gemplus is profitable already and has posted positive operating income in the first nine months of 2000. The company states that the majority of its improved profitability has been the result of higher margins in its telecommunications segment, which was led by sales of wireless products and services. But with such a large part of its business derived from Europe, the company can be impacted significantly by moves in both local currencies and the euro -- something that technology investors have heard too much about as of late.
Although it might be hard for U.S. investors to swallow, it's important to realize that Gemplus is not beholden to a revolution in the way that American consumers communicate, interact, and spend. But even if the company were viewed in that light, buyers in the Gemplus IPO aren't walking alone. There are some pretty big names right behind them hoping to cash in on the next generation of wireless communication in the U.S.
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