VeriFone’s CEO Explains Why It Spent $1 Billion on Acquisitions for a New Payments Strategy

VeriFone, the largest maker of cash registers and other payment devices, has spent more than $1 billion on acquisitions to expand internationally and to go after new opportunities, such as mobile payments.

In an interview, Doug Bergeron explained to AllThingsD the reasoning behind the spending spree, saying that the company is undertaking a major transformation that requires selling software and services — not just hardware.

Only two weeks ago, VeriFone agreed to acquire Point, a major retail payment provider in Europe, for $817 million (not including $230 million in debt). Two weeks before that, it picked up Global Bay, a smaller company that helps retailers connect their e-commerce assets to physical stores through the use of iPads. Terms of the deal were not disclosed.

Additionally, a year ago, it agreed to buy payment security provider Hypercom in an all-stock transaction valued at about $485 million, including debt.

The three acquisitions easily push the company’s investment above $1 billion. A bet of this kind represents a substantial risk, but Bergeron believes the decision to turn into a services company was a no-brainer, even calling it “obvious.”

The San Jose company, which has about 3,000 employees globally, has a history of growing through acquisitions stretching back to 2005, so maybe it can pull it off. In its fiscal 2012, the publicly-held company is projecting it will make a profit of up to $2.50 a share on revenues of up to $1.72 billion before the Point merger is taken into account.

Earlier this year, VeriFone appeared on the defensive, after Bergeron attacked San Francisco-based Square for not providing encryption in its mobile card readers. Since then, Square has promised to add another layer of protection, although the rollout is still pending.

VeriFone now seems to be on the offensive, having figured out what role it will inhabit as mobile payments come increasingly into play. And despite Bergeron’s earlier outcry about Square, he says the company will play “the role of Switzerland,” and will be neutral about which technology will win.

In particular, VeriFone wants to be the software developer that makes all the new innovations — including Google Wallet, PayPal, ISIS, the carrier-led initiative and others — work with a retailer’s existing systems. Since retailers have limited resources for technology, he believes this will be an important role.

Here are excerpts from my interview with Bergeron, who is not modest in calculating the opportunity in front of VeriFone.

What was the thought process behind the acquisitions?

Broadly speaking, VeriFone has a very impressive market share at the point of sale, and now worldwide with Point. We see the most signficant dynamic shift taking place is the new complexity that’s hitting the point of sale as a result of all the innovation that’s taking place.

It means transforming VeriFone from a focus on the best in products to both products and services. We will be delivering payments as a service. Retailers want to take advantage of Google Wallet and the iPad, and brick-and-mortar stores want to connect with online stores through multichannel integration. But these retailers don’t have 100 people on staff capable of integrating. They can either be left behind and not participate, or they can reach out to a partner to co-manage the increasing complexity at the point of sale.

Global Bay is providing software for tablets that basically allows for integration with inventory systems and e-commerce solutions and other types of services that the market is going to demand. At the end of the day, the retailers don’t want to lose a sale, and if they have someone ready to buy something, like women’s apparel or jewelry or apparel of any type or home repairs, where there’s a dialogue in the store with the customer, they want to upsell or make sure they leave with more than they would otherwise.

Otherwise, it’s hard to compete with Amazon, which has massive distribution centers across the country. But if small or large retailers can leverage their corporate distribution centers, then they have an advantage over Amazon. They have the touch factor with the person [in the store]. It’s a new age that has arrived for multichannel retail, where brick-and-mortar meets e-commerce. That’s what Global Bay is doing so well.

So you are evolving from a hardware company to a services company?

I’m going to edit your question.

We don’t produce hardware. It’s manufactured by third partners, and our product comes out of a $130 million R&D budget, of which $110 million is software.

For VeriFone, 90 to 95 percent of revenue has been product, but over the past two years, we’ve stepped up our services business with encryption and content at the point of sale.

In the fourth quarter, the quarter we are about to report on, we are projecting that services will be 22 percent of our business, and that’s on top of the total business growing dramatically. By the end of 2015, we think we can get it to 50 percent.

With the Point acquisition, which is all services — or close to it, at 88 percent — we’ll now be in the low-30s percentage.

I’m pretty sure, but for the most simple requirements, we’ll say [to the retailer], here’s the products, here’s all the boxes, and then check all the boxes for things you want, like Google Wallet, encryption; or do you want to support gift cards, or multichannel sales through the Global Bay capability?

You have a good perspective on the wide range of mobile payments that are rolling out. How many of these technologies will make it?

What I don’t know is what are the next types of innovations coming out of the Valley or other places.

Everything looks good on YouTube, or in a standalone trial, but if you have to roll it out to thousands of stores — and 50 lanes in each store — whatever new that’s out there has to coexist with the old stuff.

Who’s going to do that and the integration, and who’s going to manage the software updates? It certainly can’t be the two guys in IT, because they don’t have the resources.

How slowly will these rollouts occur? When you put it that way, it seems impossible for retailers to adopt it very quickly.

I think things move deliberately, not slowly.

That’s a bit of a wake-up call to those who come out of the online world and think they can put some code up in the cloud and it works. But when you talk to Costco, Macy’s or McDonald’s, which are all our accounts, they are innovative. They’ve rolled out pin debit or cash back, but it goes through a process of quality assurance, and they have labs where they test all this stuff, and then methodically move it out.

National retailers will have to get on board. They are the ones that move mindshare. They want the same experience in every store in every city in every state, and to mass deploy that, it takes a fair amount of planning.

How many new providers will make it?

There’s no question there will be a few, but it’s not limitless.

There’s a limit to the amount of change and chaos that the important retailers are willing to deal with at any given time. I’m describing a situation why VeriFone is so important. They [the retailers] love the meetings with PayPal and Google and ISIS, but all of this stuff has to coexist together.

In a lot of ways, we are playing the role of Switzerland. We are supportive and encouraging of all the innovation. We are the systems-agnostic guys that are operating on behalf of the retailers.

But all of these things would require software. The things that Google is trying to accomplish integrates with back-office systems at the SKU level. If it was just throwing hardware at the problem, it’s one thing, but it’s software.

You’ve talked about the importance of Global Bay, but now let’s talk a little more about the Point. Why was that acquisition important?

The data is out there. It’s a company that has grown fivefold over the last eight years, and is precisely located in the geographies in Europe that are A) healthy, and B) prone to be the first movers of mobile payments.

That’s where the Point lives and breathes. They have massive market share using VeriFone solutions, and more than half a million merchants in Northern Europe and the U.K. are using them to manage services that are largely around keeping EMV, which stands for Europay, MasterCard and Visa, up to date. EMV uses chip technology instead of swipe technology like we do here in the U.S.

They took out all the complexity of managing EMV and provided them [retailers] a monthly managed service. It’s precisely that framework and model that will allow us to turn the lights on for PayPal and Google Wallet and other services. The Point has been very much ahead of the pack, rolling out NFC capabilities before retailers have asked for it. This can be very exciting for Google and others, because it can enable a rapid deployment capability for any of them.

Are you going to make any more acquisitions? 

We are busy integrating right now. I don’t think you’ll see anything sizable for quite some time. For the most part, we are done with Hypercom, and waiting to do integration in January for the Point. For the most part, it will be independent. I think we have a lot of tools in the shed to help to find a new VeriFone.

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