L-1 Tops SAFRAN's Offer For Digimarc's ID Business

Defense Daily, July 1, 2008

By Calvin Biesecker

Determined to secure the stronghold on the nation's driver's license credentialing market, L-1 Identity Solutions [ID] yesterday boosted its offering price for Digimarc Corp. [DMRC] by nearly $50 million to $310 million, trumping SAFRAN's $300 million unsolicited offer that was disclosed last week.

Digimarc's board of directors has approved the amended offer from L-1 and is recommending that the company's stock owners tender their shares. The tender offer, which is a new wrinkle in L-1's offer that is aimed at helping expedite a swift closing, is expected to begin as early as tomorrow and as late as July 7 and remain open for 20 business days.

L-1 has already received approval from the United States government to complete the transaction. SAFRAN, which is partially owned by the French government, would need approval from the Committee on Foreign Investment in the United States to move forward with a deal for Digimarc, a process that could be lengthy with no guarantees, L-1 contends.

In addition to upping its offer price, L-1 also switched its proposal to all cash from a combination of cash and stock, in order to help curry favor with Digimarc's shareholders.

"We believe that our all cash offer is superior to the conditional, non- binding proposal from SAFRAN SA and is a strong reflection of the intrinsic value of the business, its growth opportunities, and the synergies unique to a combination with L-1," Robert LaPenta, chairman, president and CEO of L-1, said in a statement. L-1 said it will finance the deal through its existing credit lines and private equity investments, including an investment by LaPenta.

"As we expected, L-1's CEO was not going to let this one get away," Stanford Group financial analyst Jeremy Grant told Defense Daily. "The combination of the boost to a superior, all-cash offer and the accelerated closing date was enough to persuade the Digimarc board that its best option was to stay with L-1." Unless SAFRAN raises its offer, Grant expects L-1's acquisition to close by Aug. 1.

Digimarc currently is the leader in providing credentialing solutions to states for their residents' drivers' licenses with L-1 a distant second. With the implementation of the Department of Homeland Security's REAL ID program, which means compliant drivers' licences are an acceptable document for passing through security checkpoints at U.S. airports, and the move by several states to begin offering Enhanced Drivers Licenses, which is a more robust document that can be used for cross border travel, the drivers' licence business is expected to be a solid growth market.

Despite the fact that a combination of L-1 and Digimarc would dominate the vast majority of the U.S. drivers' licence market, competition, particularly from some large systems integrators, is expected to increase.

Digimarc's Identity Systems business did about $97 million in sales last year, most of it related to drivers licensing. Terms of the deal still call for Digimarc's digital watermarking business to be spun off, which would occur before the tender offer expires.

L-1 disclosed its revised offer for Digimarc yesterday afternoon. SAFRAN hasn't provided any public comment about L-1's new offer.

[Copyright 2006 Access Intelligence, LLC. All rights reserved.]

TICKER(S): L-1 Identity Solutions [ID]: Digimarc Corp. [DMRC]: