L-1 Identity Systems has confirmed it has entered into a definitive agreement to acquire Digimarc’s ID systems business in a stock and cash transaction valued at approximately US$250 million.

The proposed deal has been met with approval by investors, with shares in both companies rising since the announcement.

Under the terms of the agreement, Digimarc stockholders will receive approximately 50% of the purchase consideration in shares of L-1 stock and 50% in cash. Digimarc stockholders will also receive shares in a new company bearing the Digimarc name and holding Digimarc’s digital watermarking business. The cash consideration is approximately US$120 million. The number of L-1 shares to be issued will be based on the average price of the stock over the 20 consecutive trading days ending five days prior to closing of the transaction, and will be fixed at approximately 10.3 million shares if the average trading price of L-1’s stock is between US$11 and US$14. If the price of L-1 shares exceeds US$14 per share, the number of shares to be issued will be reduced. Under the definitive agreement, the maximum number of L-1 shares that can be issued is 11.3 million.

L-1 has also agreed to invest US$5 million in the new Digimarc.

“The synergies between our secure credentialing businesses make this a natural combination and one that will deliver great benefit to our customers and the industry,” says Robert V LaPenta, chairman and CEO of L-1 Identity Solutions. “Digimarc’s expertise in centralised production of credentials, together with L-1’s biometric recognition and document authentication capabilities, will enable us to provide a secure end-to-end solution for issuance of government credentials such as driver’s licenses. Additionally, we believe that together we will offer the best in class technology to meet the needs of US and international credentialing programs.”

Once the deal is concluded, L-1 is expected to have revenues of approximately US$670 million, adjusted EBITDA of US$110 million including operational efficiencies, unlevered free cash flow of US$75 million and a backlog of approximately US$1 billion. In addition, L-1 expects to realise synergies and additional operating efficiencies once the businesses are combined.

"This relationship comes at a particularly opportune time for Digimarc, as we are experiencing an inflection point in adoption and revenue growth for digital watermarking," says Bruce Davis, Digimarc chairman and CEO. "Our technology is beginning to permeate the full range of media content, from banknotes and secure credentials to television, movies, music, video games, digital images, advertisements, packaging, and industrial goods.

The transaction is still subject to customary regulatory approvals and other closing conditions, but is expected to close in the second half of this year.