Atos Moves in for Gemalto

French IT services group Atos announced on December 11, 2017, that it had made an unsolicited bid in the region of €4.3 billion for Gemalto.

The all-cash offer of €46 per share represented a 42% share premium, (as of Gemalto’s closing share price on the December 8th). However, and very typically, as of 12:45 GMT on the December 13^th, Gemalto’s share price rocketed to €46.3 per share, wiping out and exceeding the premium per share offer from Atos.

On December 14^th Gemalto officially rejected the takeover offer stating that its growth areas within enterprise, cyber security and M2M were not reflected in the share price offer.

Atos’ CEO Thierry Breton stated that “the combination of Atos and Gemalto would result in enhanced global leadership in security and digital technologies and services and strengthen our position as the leading European payment service provider.”

In addition, Atos’ CEO has also announced that it has already received the backing of one of Gemalto’s major shareholders, Bpifrance, which reportedly holds 8.51% of Gemalto’s shares.

The offer clearly demonstrates the value placed on the IoT security opportunity by Atos, with Atos looking towards Gemalto as a way of further extending its reach from a payments perspective, while expanding its IoT product portfolio, able to harness Gemalto’s payment, hardware-based security and management and connectivity expertise on top of the well-established and trusted relationships with banks, financial institutions, MNOs and OEMs as an anchor from which to expand and diversify.

It is true to say that Gemalto has had a challenging year, posting multiple profit warnings throughout 2017, driven directly by challenging market conditions within the payment and SIM card markets. However, both the SIM and payment cards market are expected to bounce back from the negative short-term market conditions experienced in 2016 and 2017. In addition, some of Gemalto’s other business units including enterprise, government programs, and M2M all performed well. Alongside this is the recent acquisition of 3M Cogent, acquired to provide a growth platform for its smart card business (thanks to a complimentary portfolio of biometric technologies).

The acquisition would give Atos the hardware-based security expertise that it seeks to take advantage of the IoT security opportunity, with hardware and hardware-based root of trust, the likely inception point from which device based IoT security will be addressed. In addition, Atos will have access to Gemalto’s TSM hub, which would enable remote management capabilities for remote provisioning, secure OTA updates and lifecycle management to name but a few, across a multitude of different hardware form-factors including TEE, TPM, eSE and eSIM. IoT security and enablement is now an arms race and Atos it looking towards this acquisition as the means of armament.

Atos has likely looked at Gemalto’s current situation as the perfect time to strike, the helping hand to push Gemalto back in the right direction and in order gain access to Gemalto’s complimentary products, solutions, and strengths within identity management, encryption and payments to name but a few. But Gemalto is much more than a platforms and solutions provider, with the largest proposition of its annual revenues continuing to be generated by its core and traditional smart card business.

Atos is a traditional IT service provider and with so much focus on the IoT and related platforms and services, one has to ask what might happen to Gemalto’s core traditional smart card business, some of which is not well aligned with Atos’ IT services based focus, but an area which still represents approximately 60 – 70% of Gemalto’s annual revenues.

Possible Scenarios:

• Atos will spin off Gemalto’s traditional smart card business, part retaining anything pertaining to embedded hardware security and any management platforms, perhaps reorganizing Gemalto as a smart card vendor with Atos absorbing any complimentary platforms and services.
• Atos will sell off certain segments of Gemalto’s traditional smart card piece (most likely its mobile business unit), but retain its payment cards business, which is considered complimentary to Atos’ existing payments portfolio.
• Atos will absorb the complete Gemalto organization, recognizing the value of the traditional smart card market as a pivotal piece required to diversify into the embedded IoT security opportunity, using smart card technology and expertise within the DNA of its future IoT security offerings.

The latter option would likely prove to be the most difficult path to take, given consistent pressure to smart card ASPs and margins, but may prove the opportunity to look at the whole Gemalto business, reorganizing the firm to fully integrate with Atos future focus. With that said, ABI Research believes Atos will consider options 1 & 2 in a bid to recoup some of the money invested in the likely acquisition of Gemalto.

It’s very early days and we can only speculate to Atos’ plans for Gemalto, but what is certain is that Atos’ offer is just the latest in a flurry of M&A activity, directly driven by the IoT security opportunity.

When we think about Atos we do not think about smart cards and Atos’ service focus may be to the detriment of certain Gemalto smart card business units. However, it is ABI Research’s  opinion that Atos should maintain all aspects of Gemalto’s smart card business and expertise, using it as the backbone from which embedded  IoT security will be addressed, deploying a strategy of pivoting Gemalto’s revenues (over time) from smart card supply, more heavily towards supporting security platforms and services. In addition, there are many synergies between the traditional smart card and emerging embedded IoT security markets and it should be remembered that smart card technology, repurposed into embedded into devices will have a significant market role to play.

From a security perspective, the IoT market remains in a nascent and exploratory phase. Gemalto remains well positioned to take advantage and there is no doubt that the IoT security opportunity is one which is extremely dynamic and one where vendors are willing to spend big, and at a premium, to ensure that the required products and solutions are positioned. However, in the interim, Gemalto revenues will continue to be heavily weighted towards its traditional smart card business, and this transitional phase and revenue pivot from hardware to software and services, one which will need carefully management to ensure continued revenue streams and continued access to the required smart card expertise in order to fully address the embedded IoT market opportunity.

In short, Atos’ acquisition strike has been timed very deliberately, but ABI Research believes that Gemalto should consider all options very carefully and shareholders should be mindful of the close synergies between Gemalto’s traditional smart card business and the emerging embedded IoT security opportunity and carefully weigh up the “premium” value received per share today, versus the 55 billion connected device opportunity presented tomorrow.