Gemalto bags Qualcomm deal for PC eSIMs

Gemalto has announced a new partnership that will see its eSIM solution integrated into Qualcomm’s Snapdragon Mobile PC platform, another incremental step towards the reality of always-connected PCs.

The concept of the eSIM is not a new one, though progress has been relatively slow to date. Some might point towards the operators as the speed bump in the road, as the concept does allow for a simplified transition between connectivity providers, though the technology does have the potential to open up a new wave of innovation. Reprogrammable SIMs would certainly add to the growing IoT trends, removing the hassle of manually changing SIMs.

The partnership itself will see Gemalto’s eSIM technology and remote subscription management solutions integrated into the Snapdragon mobile PC platform’s Secure Processing Unit, allowing for the introduction of consumer applications such as online payments, transport ticketing and authentication to cloud services.

“This new agreement with Qualcomm Technologies aims at accelerating adoption of seamless cellular connectivity in PCs, tablets and other mobile products,” said Frédéric Vasnier, EVP for Mobile and IoT at Gemalto. “We are committed to continued innovation with Qualcomm Technologies in order to provide superior built-in security and connectivity experiences.”

The partnership is set to kick into reality with the launch of the first connected-laptops next year, though this certainly is a good sign for Gemalto. The potential market for eSIMs is monumental, essentially everything which has an IoT use-case, therefore piggy-backing off Qualcomm success is not necessarily a bad more.

Security is NOT a priority – especially in Japan

PR gimmicks and posturing are irritatingly common in the telco and tech space, most notably when it comes to security. But new research from Gemalto indicates many of the promises are empty.

With data protection and privacy proving to be a bit of a hot topic for consumers nowadays, especially with almost weekly reports of calamitous breaches, security is a good plug for CEOs and CTOs to earn some brand credibility. Should Gemalto’s research prove to be accurate, these statements are nothing more than empty promises from shallow executives who fail to back-up ambitions with any fundamental changes or investment.

While we have taken a relatively negative view here, it should be worth noting security is becoming a bit more of a concern. According to the data, cost and deployment time of new services are the two main drivers for cloud adoption, but security is at least part of the conversation. 26% of the respondents to the survey highlight security credentials are part of the selection process, up from 12% in 2015, but this is still an incredibly small number.

That said, such a dismissive view on security could be dependent on where in the world you are, as you can see from the map below, with Germany hitting the top of the list, and Japan at the bottom:

Global Data Protection

Gemalto asked the respondents whether their organization is careful about sharing sensitive and confidential information with third parties. The fact that Germany is top of the list should surprise very few. Data protection, privacy and residency regulations in the country are some of the most stringent worldwide, though it should be noted that Europe on the whole is quite stern when it comes to data.

What should be concerning is the UK’s statistics; only 35% of the respondents, who are employees of UK firms, believe their organization is serious about how they share information. Only 43% believe their organization proactive in managing compliance with privacy and data protection regulations in the cloud environment, while only 50% of UK businesses have a policy that requires the use of security safeguards as a condition to using certain cloud computing applications.

The UK is not the worst country which was assessed as part of the research, but it certainly wasn’t the best. Considering it is trying to keep in the good books of the European Union with Brexit on the horizon, you would think a more stringent approach to data protection and privacy would be a good place to start. Whether these numbers are high enough to meet to firm standards of the European Union remains to be seen.

Perhaps the most worrying statistic to be drawn out of this research surrounds data encryption. 77% of the respondents believe securing sensitive and confidential information in the cloud with encryption is important today, though only 40% are currently doing it.

Of those who are using encryption tools, 43% believe the information is made unreadable before it is sent to the cloud, 28% say information at rest is made unreadable in the cloud using the vendors tools, while 27% say this information secured in the cloud with the organizations own tools. 52% believe the encryption keys are then controlled in-house, 21% believe it is done by the cloud provider, while 16% hand them over to a third-party.

There are certainly year-on-year improvements on attitudes towards security and also the implementation of new technologies, but this is sluggish progress. A lack of encryption is worrying, especially when you consider the number of breaches which are being reported. Cloud maybe normalized, and arguably more secure than on premise, but hackers are getting brighter; every precaution should be made for sensitive and confidential information.

Unfortunately, it does appear that security will continue to be a PR tool for grinning CEOs to feed to the masses for at least the near future.

Atos beaten to Gemalto prize by Thales

Atos’ unsolicited €4.3 billion attempt to acquire Gemalto is now nothing more than a footnote as Thales swoops in with an additional €500 million to tempt Gemalto into signing the dotted line.

Thales has stepped into the game with a bid of €51 per share, roughly a 6% premium on the closing price prior to the weekend, totalling €4.76 billion. Gemalto executives have told local press the pair have been in discussions for months, though the somewhat-surprising entry of Thales has beat back suitor Atos.

“The acquisition of Gemalto marks a key milestone in the implementation of Thales’s strategy,” said Patrice Caine, Thales’s CEO. “Together with Gemalto’s management, we have big ambitions based on a shared vision of the digital transformation of our industries and customers.”

Bringing Gemalto into the Thales business will support the lumbering titan’s slow stagger into the digital world. Gemalto certainly adds to the digital product portfolio, as well as €3 billion in annual sales, as the team sets it’s sites on security in the IoT, mobile and cloud world.

Last week, Atos made a €4.3 billion bid for Gemalto, a 42% premium on the Gemalto share price immediately before the bid, though a lukewarm reception cast doubts over a deal. Reasons cited were exactly as you would expect; potential growth meant this bid shouldn’t be taken seriously, however, Thales’ giant offer seemed to have caused a few blushes around the boardroom.

“The Board of Directors, after full and careful review, together with its financial and legal advisors, of the various options available to the Company, has established unanimously that the Thales offer is in the best interests of Gemalto and all its stakeholders,” said Alex Mandl, Chairman of Gemalto’s Board of Directors.

Of course, this is about more than money though; a tie up with Thales will offer greater opportunities for the Gemalto business.

“As a result, the Gemalto Board of Directors unanimously recommends the Thales offer to its shareholders,” added Mandl, before retiring in a flurry of giggles and blushes to the safety of the boardroom.

The news will come as a blow to Atos CEO Thierry Breton who had claimed his approach had been supported by the French government, which owns roughly 8% of Gemalto.

Gemalto just says no to Atos

Digital security vendor Gemalto has taken little time to reject an unsolicited takeover bid from Atos on the grounds that it’s rubbish.

Specifically Gemalto is citing the fairly standard range of objections: bid too low, more value to shareholders from potential organic growth, etc. Despite the initial indication that this unsolicited bid was somehow ‘friendly’, it doesn’t seem to have been received as such by the Gemalto board.

“In 11 years, we have turned Gemalto into a technology blue-chip, recognized in over 180 countries throughout the world,” said Philippe Vallée, Gemalto CEO. “In 11 years, the company has created 5 000 jobs. In 11 years, Gemalto has become the world leader in digital security.

“We have taken the measure of the recent changes in our historical markets, taken the responsible decisions and are now focused on leveraging the many opportunities of our fast-growing markets.

“We will soon be presenting to our stakeholders our ambitious and substantial development plan for the company that will focus on the next generation of digital security for companies, governments and citizens worldwide.

“Gemalto’s employees, its Board of Directors, its management team and I are fully aligned and committed to achieving the success of this plan that will benefit our stakeholders, including all our shareholders.”

Gemalto has provided a fairly detailed set of rationale for rejecting the bid, which seems reasonably convincing and is reminiscent of Qualcomm’s rejection of Broadcom’s overtures. Atos is now faced with the same choice of whether to go hostile or walk away. You can see the full rebuttal in the Gemalto letter to Atos, copied below.

 

Mr Thierry Breton

Chairman and CEO

Atos S.E.

River Ouest

80 quai Voltaire

95877 Bezons Cedex

France

Amsterdam, 13 December 2017

 

Dear Mr Breton,

We refer to your letters dated 27 November, 8 December and 11 December 2017, as well as to your announcement of 11 December 2017.

The Board (the Board) of Gemalto N.V. (Gemalto or the Company) has, together with its financial advisors Deutsche Bank and J.P. Morgan and its legal advisors Allen & Overy and Darrois Villey Maillot Brochier, carefully reviewed and considered your unsolicited and conditional proposal for a possible recommended offer for all issued and outstanding shares of Gemalto N.V. as set forth in your letters and in the draft framework for a merger protocol that you sent in parallel to your letter of 8 December 2017 (the Proposal).

Consistent with its fiduciary duties, the Board has reviewed and discussed whether your Proposal is in the best interests of the Company, its business, employees, shareholders and other stakeholders. After thorough consideration the board has unanimously come to the conclusion that this is not the case. In the review by the Board, leading to this conclusion, the following is particularly relevant.

Strategy

We believe that Gemalto – the world leader in digital security – is best positioned to grow successfully on a standalone basis and create long term value for its stakeholders, including its shareholders. As you note in your investor presentation, we have a unique technology platform that allows us to support our clients’ digital security needs across multiple high-growth markets. We are well advanced in transitioning our business towards the higher growth Government, Enterprise, Cybersecurity and Machine-to-Machine end markets. We have grown organically significant businesses in On Demand connectivity platforms for mobile operators and in Authentication as a Service platforms for online services access. The board is confident that Gemalto management will deliver the already announced transition plan and the Company is best positioned to deliver long term value given its current capabilities and positioning. Our transition plan is well underway and will allow us to be more agile and nimble and better serve our clients’ needs going forward.

Your Proposal is unclear as to critical elements of the combined strategy, integration approach and impact on Gemalto, particularly because it lacks a detailed explanation of operational structuring and synergy potential. Gemalto is organized to benefit from innovation across our business units and we believe the potential break-up and contribution to three separate divisions (for example the integration of the payments business into your independent and publicly listed subsidiary Worldline) could negatively impact the propagation of our most advanced technologies and our ability to best serve our clients.  Moreover, we think that there will be significant challenges in combining our businesses in the short term which are not addressed in your proposal. Finally, the synergy framework outlined in your presentation is very high level.

Valuation

The Board considers that the Proposal significantly undervalues the Company and is not reflective of the intrinsic value and prospects of Gemalto.

The timing of your Proposal is opportunistic, seeking to take control of the Company at a price that represents a discount of 27.4% vs. our last 12-month high and a premium of only 3.5%[2] vs. our 12-month average share price and at the time when the Company has stabilised its performance following a challenging period.

As mentioned, our business mix today is transitioning towards attractive growth activities such as Government, Enterprise & Cybersecurity and Machine-to-Machine, which together accounted for over 55% of our Q3 2017 reported revenue and grew at over 20% year-on-year.  Such businesses, especially at scale, are very scarce and of high strategic value. The impact of this transition is yet to be fully reflected in the Company’s share price and our strategy and positioning around these growth segments will be further detailed during our forthcoming Capital Markets Day.

Your proposed offer price of EUR46 per share corresponds to a valuation which does not reflect our leadership positions in these faster growing segments, and is well below the valuation levels of companies involved in highly strategic Government and Security activities.

In addition, we would expect any Proposal to adequately reflect a fair sharing of synergies accruing from a transaction, which you have indicated you believe to be substantial.

Deal certainty

The Board considers that your Proposal does not provide adequate deal certainty, given the significant conditionality attached to it, and given the execution risks involved in the transaction envisaged by your Proposal. In particular, your Proposal does not contain a substantiated explanation on, and analysis of, the envisaged anti-trust clearance procedures, timing, risks and potential remedies you would be prepared to offer to ensure completion of the contemplated transaction. The same applies in respect of any other regulatory clearances that may be required, such as CFIUS. In addition, your draft framework for the merger protocol contains a number of off-market, unclear, unusual and unacceptable terms and conditions, that give further serious concerns on deal certainty.

Stakeholders

Importantly, the Board concludes that your Proposal is not sufficient in addressing the interests of the Company, its business, employees, shareholders and other stakeholders.

We are continually developing our business in response to the constantly evolving needs of our customers, with whom we develop innovative solutions through trusted and long-term relationships. Our business is key to the governments and citizens that we serve in the area of data security, data privacy and confidentiality.

We put a strong focus on developing solutions that help tackle some of society’s major challenges, ranging from financial inclusion to efficient and accessible health and welfare services. We continuously maintain significant commercial and technical investments, as we believe these will contribute over the long-term to the progress of the mobile and digital society for our customers and for citizens. For example our investments contribute to the continuous global interoperability of mobile telephony systems and card payment systems, as well as the global deployment of interoperable digital identity systems that people, companies and governments can trust, such as electronic ID documents and their fully digital equivalents such as trusted digital driver licenses on mobile phones.

Your draft framework for a merger protocol provides only for very limited protection of our stakeholders. This is not in line with market practice, and is not in line with a friendly recommended transaction. In this respect, your Proposal mentions only a small number of general topics, without mentioning actual and concrete commitments. Important non-financial covenants (NFCs) customary for a friendly recommended transaction of this size and nature are not included in your Proposal, including, but not limited to, those on no-redundancies, continued R&D, approach to customers, the employees’ savings plans, the employee share option plan, and the required fair dealing and protection of the interest of any remaining minority shareholders after your offer would be declared unconditional. In addition, the proposed duration of the NFCs is not specified, and the enforcement of the NFCs is not safeguarded post-completion and delisting, leaving our other stakeholders essentially unprotected.

Your approach

We also noted that your approach in making your Proposal is not reflective of a truly friendly and collaborative approach. On 28 November 2017, your first letter on the Proposal was delivered to our CEO without customary preceding explorative discussions. Following our communication to you that we would revert on or before the 15 December 2017, on 11 December 2017 you announced the Proposal unilaterally without prior consultation. In your announcement of the Proposal you also indicated that you will proceed with filing an offer memorandum with the AFM, irrespective of whether or not you have reached agreement with Gemalto.

This sequence of events and the steps you have chosen to take, have led the Board to believe that your approach, contrary to your statements in your announcement of the Proposal, is not friendly and collaborative. Obviously, the nature of an approach and real signs of a true intention to seek the Board’s support are important for the Board’s consideration of any proposal. We have concerns that this could exemplify cultural differences between our two companies.

Conclusion

After its thorough and careful review, our Board has determined that your Proposal does not, from the perspective of Gemalto, have a sufficiently substantiated strategic rationale and fails to adequately address the consequences it will have for Gemalto’s business. Furthermore, the Board has determined that your Proposal significantly undervalues the Company, is highly conditional and uncertain and fails to adequately address the interests of our various stakeholders. As such, your Proposal does not form a basis for constructive engagement.

Thank you for your proposal and for your interest in our Company.

Very truly yours,

Alex Mandl – Chairman of the Board, Phillipe Vallée – Chief Executive Officer

Atos wants to buy security vendor Gemalto for €4.3 billion

Gemalto, which specialises in SIM-card technology among other things, has received an unsolicited take-over bid from French IT giant Atos.

Atos is offering €46 per share, which is apparently a 42% premium on the Gemalto share price immediately before the bid was made. Despite it being unsolicited the bid is said to be ‘friendly’ (as opposed to hostile) because the two CEOs have had a nice, civilised chat about it.

“On November 28, 2017 Atos submitted its Proposal, valid until December 15, 2017 to the board of the Company,” said the Gemalto announcement. “The Company subsequently informed Atos that it would carefully review the Proposal and respond to it before such date.

“The board of the Company will continue its process of reviewing and considering the Proposal together with its financial and legal advisors in accordance with its fiduciary duties to determine the best course of action in the interest of the Company, its business, employees, shareholders and other stakeholders. There is no certainty that the Proposal will lead to a recommended firm offer for the Company.”

The French state seems to have a big role in all this, owning stakes in both companies, and apparently views the creation of a digital security giant as something of strategic interest. By no coincidence Gemalto’s share price has gone down the toilet this year and, despite the premium, the bid values the company significantly lower than its market price as recently as July of this year.