Note To Diebold: Drop the Voting Machine Business

Talk about the tail wagging the dog. Election Systems makes up 8% of Diebold’s (DBD) sales and 80% (or more) of its headaches. Although the segment nearly tripled in size (contributing 5% growth to the overall company), one has to wonder if it is all worthwhile. With payment for many election systems tied up while partisans dispute the machine’s effectiveness (note to management: if you want to compete selling voting machines, don’t skew your political donations to one party), the cash flow has deteriorated despite rising revenue and net income.

As Business Week Reports:

A recent study by Princeton University that claims the panel door protecting the memory card on Diebold’s AccuVote-TS voting machine can be opened with a hotel mini-bar key has triggered howls of outrage all over the blogosphere. And citizen groups in California and Wisconsin have filed lawsuits to block the use of Diebold voting machines in the upcoming midterm Congressional elections. These headaches aside, Diebold President and CEO Thomas W. Swidarski can take solace in the fact that his company is on a tear right now selling ATMs to mainland Chinese banks.

Thanks to recent big orders from the Bank of China, China Construction Bank, and the mainland’s national post office which also does banking, Diebold has clawed its way to No. 1 on the mainland with a 30% market share. That is just ahead of ahead of rival NCR (NCR) and 15 or so Chinese domestic rivals. “Chinese banks are preparing to compete on a global basis,” says CEO Swidarski. “They are looking at how to automate their retail operations.”

Diebold is trading at a hefty enterprise value of 44x it’s free cash flow, compared to just 13x for NCR. However, we estimate that without the election systems, segment free cash flow would improve and reduce the multiple for Diebold to just 19x. It would still be higher than NCR’s, but the difference would be much less. Plus, management would be able to focus on running the business rather than dealing with outraged partisans.

Now if only we could get the dog’s tail snipped…

DBD 1-yr chart:

Comment on this article

Comments

[David Jackson:]

Outstanding article.

2006 Oct 18 06:28 PM

[Steven Hert...:]

Given the quality of Diebold Voting machines, it leaves one to wonder about the integrity of their ATM products. Could it be that Diebold's ATM technology suffers from similar disfunction and just no one is looking, or that banks are simply not disclosing known issues. It certainly leaves one to wonder. If they can't be trusted in the voting business, then why the heck invest in their ATM business?

2006 Oct 18 07:35 PM

[William Trent_:]

David - Thanks.
Steven - if I see you with a minibar key around my bank I'm calling the cops!

Seriously, though - for the ATMs I think half the protection is that they are built into the wall, whereas voting machines have more open access. Also, I doubt anyone is going to get away with opening a DBD voting machine at the polls - the issue is partly hyped by people offended by their donations to the opposing party. You also get issues where there is a spec requested then people are mad later when the specs didn't include something else.

But put it this way - if DBD's home state (Ohio) gave them a hard time about payment and verification what can you expect of the other 49 states? And you illustrate one of my points, which is that whether justified or not the voting machine issues create a quality perception that extends to the ATM business. The sooner they cut the ties the less damage there will be.

2006 Oct 18 10:37 PM