LinkedIn’s Stolen Passwords Spell Profit for Gemalto

Gemalto NV (GTO) wants to put high-tech authentication devices in the hands of every Facebook Inc. (FB) user, as high-profile hacking incidents spur concern over protecting personal data on social networks.

Gemalto is in talks to sell its mix of hardware and software security systems to networking sites, after signing with banks, governments, and clients such as Microsoft Corp. (MSFT) and Boeing Co. (BA), Chief Executive Officer Olivier Piou said. Internet service providers, whether they operate a social network or online gaming application, are waking up to the fact that password-only protection isn’t enough, he said.

“Every company has been or will be hacked,” the 53-year- old said in an interview in Bloomberg’s offices in London yesterday. “Whatever information you share today, you should not assume it will be protected.”

Demand for smart chips used in bank and phone cards helped propel Gemalto’s stock to become the best performer in the SBF120 Index of France’s 120 biggest companies in the past year. Now, Piou is targeting anxious consumers. LinkedIn Corp. (LNKD), the biggest online professional network, said last week hackers had stolen 6.5 million user passwords. Customers of CBS Corp.’s Last.fm music site and EHarmony Inc.’s dating portal also had passwords stolen last week. Both companies suggested that users immediately change their passwords.

High-Tech Bracelets

Gemalto, the inventor of the smart-card chip, said users could use a combination of a password and the SIM card in their mobile phones to log into their Facebook accounts, describing one possible solution for social networks. Users could also enter a pin code into a handheld device to generate a temporary password to use on the Internet, similar to offerings from some banks. Other alternatives include fingerprint readers, USB keys and high-tech bracelets, Piou said.

Gemalto, based in Amsterdam and with annual revenue of 2 billion euros ($2.5 billion), makes about half of its sales from subscriber identification module, or SIM, cards for mobile phones and services to network operators. It signed its first security contract in 2004 with the U.S. government.

Today, Gemalto’s security unit helps make American and French passports as well as manage employee access to sensitive data in companies, all using a two-part identity check, with software and hardware support.

Sony Hackers

LinkedIn, based in Mountain View, California, said last week that it was in contact with the U.S. Federal Bureau of Investigation after user passwords were posted on a hacker site.

Sony Corp. (6758), the maker of PlayStation game consoles, was hit last year when hackers compromised more than 100 million customer accounts in April and 93,000 others in October.

Piou, who has been running Gemalto since it was created in 2006 through the merger of Gemplus and Axalto, said the company’s 5,000 patents allowed it to find new security offerings.

“Customers today expect security to be provided by the service providers, by the Sonys and LinkedIns,” he said. “Every service provider needs to have a non-repudiable identity check, whether to access data, to pay, whether you want to access your Facebook wall or the wall of your friends.”

Gemalto, which competes with Germany’s Giesecke & Devrient GmbH and France’s Oberthur Technologies SA, already works with Facebook through a SIM application which allows users to connect to the social network from basic phones lacking the graphic functionality of smartphones, providing a text-menu access to status updates, pokes and friend requests.

Perfect Curve

The security unit has the potential to become Gemalto’s most profitable, as revenue growth at the division continues to follow “a perfect J curve”, Piou said.

The unit posted an operating profit of 29.8 million euros last year on sales of 310 million euros, accounting for 15 percent of total revenue. The division had a profit margin of 9.6 percent compared with 11.9 percent for the company. The figures exclude some smaller assets Gemalto is holding for sale.

In March, the company forecast revenue and operating profit will increase this year. Gemalto, which has been shifting revenue from older commoditized smart chips to new security technology, predicts its business will also benefit from a ramp- up in contactless mobile payment and machine-to-machine transmissions. Gemalto this year unveiled a SIM-card tested by Mastercard Inc. (MA), Visa Inc. (V) and American Express Co. (AXP) to get more mobile operators on board with wireless payment.

Expensive Target

The stock dropped 0.2 percent to 52.18 euros at 9:45 a.m., valuing the company at 4.6 billion euros. The shares have more than doubled since the company’s 2006 foundation.

Asked whether Gemalto will become a takeover target following the acquisition of British software and technology services companies Logica Plc (LOG), Autonomy Corp. and Misys Plc in the last 12 months, Piou said the company would probably be too expensive for potential buyers.

“I was more concerned when we did the IPO,” he said. “We could have been gobbled up easily. Today we are worth about 4 billion euros. A company couldn’t just come up with 10 billion euros like that. If they were to buy us, they would need a good plan.”

To contact the reporters on this story: Marie Mawad in Paris at mmawad1@bloomberg.net; Jonathan Browning in London at jbrowning9@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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