L-1 Identity Solutions’ [ID] agreement to acquire the ID Systems business of Digimarc Corp. [DMRC] would give it 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 about 90 percent of the, 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, tells TR2.
Robert LaPenta, L-1’s chairman and CEO, 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. The entry barriers are “not large” and with the federal government pushing states to adopt more secure drivers’ licenses and processes for obtaining those licenses, “we expect it to be a very competitive environment,” he says.
Unisys [UIS] is one of those firms looking to get into the driver’s license market, LaPenta says. Other large integrators such as Accenture [ACN] and BearingPoint [BE] have also been competing to provide drivers’ licenses services to states, says Stanford Group analyst Jeremy Grant.
Analysts generally don’t see federal regulators blocking the acquisition despite the near monopoly–at least in the near-term–it would give L-1 in providing license enrollment, authentication and issuance systems to the states’ motor vehicle departments. Grant suggests that some competitors might welcome the consolidation because it would eliminate one of two strong competitors in that space.
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. L-1 is also participating in two other states. However Digimarc provides centralized card production, which means a card is produce from a central location and then sent out to the applicant. L-1 provides over-the-counter card issuance, which allows 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 says 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.
While the immediate focus of the pending acquisition in market terms is the driver’s license market, the deal certainly bolsters L-1’s efforts to dominate the identity solutions space as the only provider of organic end-to-end identity management capabilities.
“As large scale identity solutions start to be rolled out in the United States and across the world, we believe L-1 is well positioned to supply technology components, solutions and services on a broad swath of projects,” Grant says. “L-1’s solid foundation of technologies, capabilities, and customers allow it to provide a wider range of identity technologies than its competitors.”
Still, Grant cautions that L-1 faces “stiff competitions” from other firms in the biometrics and identity solutions space as well as the larger systems integrators who are creating capabilities here. Indeed, earlier this year Accenture introduced its own end-to-end identity management platform that and plug in various technologies from multiple vendors (TR2, Feb. 20). Accenture says that one of its discriminators is that it understands how to unlock the value of identity management across an enterprise.
“Ultimately for identity management to work globally there’s got to be interconnection of all the databases and secure credentialing processes and common understanding of the treaties and all kinds of things that need to go on,” says Davis. “So what’s happening now is the building blocks are starting to be put in place, nation by nation for that ultimate interconnection of nations in the global market. L-1 is positioning itself to be a major player in that global marketplace. That’s the end game.”
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 says 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 says. “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 of, making it harder to counterfeit money or easier to track the use of audio and video documents.
Under the terms of the deal L-1 would acquire Digimarc’s ID business for $250 million, split 50-50 between cash and stock. LaPenta says L-1 wanted to use more cash but that Digimarc wanted more stock so that its shareholders could have a stake in L-1. 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.