Sunday, February 12, 2006

60 Days of Breathless Activity

Innovative Financing, Innovative Acquistions and Innovative Strategies

Pay By Touch relied on nontraditional sources for its financing, totaling $190 million in the last 90 days.

If you don't have to, why would you go through VC's who suck up stock and tell you how to run your company? Founder John Rogers, with the help of Gus Spanos, didn’t want to lose control by selling more of the company’s equity, executives at the company said, so he hedged his bets.

The firm turned to the hedge fund community in hopes that it would understand the company’s financing structure better. Apparently they did, and gave them $130M last October. It helped that the hedge fund firms also quickly understood that a near-term liquidity event, like an IPO, was forthcoming. That always entices potential investors. Look for one to occur within the next 15 months, sooner if Walmart or Costco announce they will implement PBT's payment platform. Pay by Touch used the $130 million to make key acquistions and promptly got $60 million more. Let's take a look at these acquistions in more detail.

Breathless Acquisition Binge

After Pay by Touch acquired $130M they quickly moved to acquire key companies which further enhanced their product suite. On the heels of a breathless acquisition binge, 3-year-old San Francisco-based Pay By Touch raised $60 million in new financing last week, from hedge funds Plainfield Asset Management and Scout Capital, and private investors such as
Quince Associates and Global Trust Partners.

Its latest round, the company's third, brought its total to nearly $200 million -- in the last three months. In October, the company bagged $130 million, enough loot to acquire companies including
BioPay, CardSystems, Capture Resource, 7th Street Software, and Convena.
Pay By Touch makes software that lets shoppers link their fingerprints to their bank accounts and leave their wallets at home. Judging from the company's recent haul, it works on investors as well.

One of the key factors that made Pay By Touch an interesting investment is that it plans on going public. "I don't think that an IPO 12 to 18 months from now is unreasonable," says Gus Spanos, chief archietect of the deal. But aside from the potential to profit from an initial public offering, the hedge funds were probably influenced by the company's patents. They now hold 31 with over 70 pending.

My personal favorite deal was the "elimination by acquistion" of BioPay, their chief rival and only competition in the biometric payment space. Although PBT had over 25 issued "biometric payment" patents, BioPay was issued one for check cashing on November 1st. That was a key point as BioPay had over 35 more pending. Pay by Touch entered into it's agreement to eradicate their competition 36 days later on December 6th, 2005. Pay by Touch recently finalized the $82M deal, so in effect, Pay by Touch paid $82 million dollars for the right to be the dominant player in the industry, money that I believe was tremendously well spent.

According to Brian Ruttenbur, a homeland security and technology analyst at Morgan Keegan, "Pay By Touch is uniquely positioned in the transaction-processing space," Ruttenbur says.

Pay By Touch has also been making other key acquisitions, including the purchase of CardSystems Solutions, which was completed in December, for $47 million. You may recall that CardSystems had been blamed for a massive breach of security last year that exposed personal information on up to 40 million MasterCard accounts. Pay by Touch purchased only their assets (to mitigate liability) chiefly for their 120,000 merchant processing client base and established ISO network. PBT paid only $47 million, which was indeed, a bargain basement price. Consider that 120,000 retailers generating revenue of $25 per month each results in a $47 million payback in a little over 15 months.

Pay By Touch’s acquisition of CardSystems occurred after a deal for
CyberSource to acquire CardSystems fell through (see CardSystems Bought [Again]). (RED HERRING) Pay by Touch, recognizing the opportunity, simply outbid CyberSource. In 2004, Pay by Touch bought Intercept's merchant processing division, consisting of about 18,000 merchants. So in addition to being the dominant player biometric payments, they are a major player in the credit/debit payment processing space as well. Using the same $25 per month revenue stream, 138,000 clients generate $3.5 million per month, or $42 million per year. That revenue, combined with the $190 million, plus any additional revenue from an IPO and it's safe to say that Pay by Touch is a company to watch...closely. It'll be interesting to see if they can get Visa and MasterCard to join Discover and charge a lower rate for the more secure biometric payment method.

Pay by Touch made three other acquisitions during December. On December 15, Pay By Touch acquired the assets and intellectual property of two loyalty technology providers, 7th Street Software, who has a patent pending on it's complex Loyalty Suite Program, and Convena, for undisclosed sums.

On December 2, the company acquired Capture Resource, a Pennsylvania-based supplier of reward programs and business process outsourcing services, for an undisclosed sum. The deal will allow Pay By Touch to offer customers interactive gift and reward programs, as well as other services. The company will now manage Capture Resource's 130 million consumer loyalty enrollment profiles, including more than 12,000 supermarkets and retail locations. Capture Resource processes over 25 million applications and produces more than 30 million Reward Cards/Keytags and Gift Cards annually. It manages a database of 130,000,000 cardholders.
Capture Resource has processing data centers in the US, Mexico and India opening the door to growth overseas and in Mexico. (map on right)

WIN-WIN Gaming, a Las Vegas company recently borrowed $1 million from San Francisco-based Solidus Networks, which does business as Pay By Touch and provides electronic fingerprint-reading technology. The secured loan bears a 15 percent interest rate. The loan was related to a joint venture agreement with Pay By Touch. WinWin agreed to help Pay By Touch make the technology available for the Chinese Video Lottery Terminal program, introduce Pay By Touch managers to Chinese officials and advise Pay By Touch on doing business in China.

So in addition to earning 15% on their money, WIN-WIN agreed to introduce them to the Chinese Big Shots to help bring them to the Mainland. (
opening in China is a definite "Who You Know" not "What you Know") John Rogers, CEO and Founder of Pay by Touch sits on their advisory board.

Completing their unbelievable acquistion string, they completed their previously announced acquistion of ATM Direct out of bankruptcy. ATM Direct is a payment acquirer/processor that enables Financial Institutions to provide PIN-based debit payments and authentication over the Internet.

ATM Direct is the only company in the world that provides these services with a software-only solution. PIN-debit transactions are fully authenticated, real-time cash transactions. PIN-debit payments require a Personal Identification Number or PIN with every transaction. Your PIN is legal proof of your identity and “authenticates” your transactions, virtually eliminating online fraud.

ATM Direct represents a significant breakthrough for Internet commerce by providing secure cash payments and identity authentication through a personal computer and use of bank-issued PIN. ATM Direct’s Internet PIN-debit transactions process over the world’s bank and EFT networks like conventional transactions and do not require any changes to bank or network infrastructure and processes. This allows rapid and low cost adoption worldwide.

ATM Direct turns over 580 million computers into secure payment terminals allowing consumers everywhere to immediately pay and transfer cash electronically from their computer. Over 1 billion ATM cardholders can now be Internet customers. including ones that are credit-wary, credit-challenged or have reached their credit limits.

Pay by Touch Online, which was introduced at DEMO 2006 and won an INNY Award, does not yet incorporate ATM Directs technology, but when it does, PayPal is dead in the water. Every Intenet Retailer except for eBay (which owns PayPal) will have no choice but to offer PBT Online. The savings will result in a fiscal demand and the security will eliminate millions in back office costs for these companies.

Yes indeed, Mr.Ruttenbur, Pay by Touch surely is uniqued positioned in the payments space.

Pay By Touch

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