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Company Perspectives:
Our objective is to enhance our position as a leading provider of tec hnology that enables electronic payment transactions and value-added services at the point of sale. The key elements of our strategy are t o: increase market share in North American and Europe; further penetr ate attractive vertical markets; capitalize on high growth opportunit ies in emerging markets; and pursue selective, strategic acquisitions .
VeriFone Holdings, Inc., is a leading provider of technology that ena bles electronic payment transactions. Along with point of sale (POS) software and terminals, the company provides systems that process a v ariety of payment types including signature and PIN-based debit cards , credit cards, contactless, smart cards, prepaid gift and store-valu e cards, electronic bill payment, check authorization and conversion, signature capture, and electronic benefits transfer. VeriFone's cust omers include global financial institutions, payment processors, petr oleum companies, large retailers, government organizations, healthcar e companies, quick service restaurants, and independent sales organiz ations that resell VeriFone's products and services. The company chan ged ownership several times during the late 1990s and early years of the new millennium. Hewlett-Packard Co. acquired the company in 1997 and then sold it to Gores Technology Group in 2001. Private equity fi rm GTCR Golder Rauner bought a controlling interest in VeriFone the f ollowing year. The company launched a second initial public offering in April 2005.
Pioneering Transaction Automation in the 1980s
William Melton already had more than a decade of experience in paymen t processing before founding VeriFone in 1981. Ten years earlier, Mel ton had founded Real-Share, Inc., in Hawaii, a pioneer in the use of computers and other database and telecommunications systems for check authorization and guarantees. In 1980, Melton sold Real-Share to Tel eCheck Services, later part of First Financial Management Corporation for some $3 million and used this money to start up VeriFone in Honolulu the following year. Initially, the company provided retailer s with access to information on people known to have written bad chec ks. The company started at the local level, but soon spread throughou t the islands. Part of Melton's operating philosophy was to place his sales and support staff close to the company's customers. To maintai n contact among his widely dispersed employees, Melton turned to the nascent networking and portable computer industries, outfitting the c ompany with early e-mail messaging and online database capabilities.
A development in the still-young credit card industry, however, cause d Melton to change the focus of the company. The use of credit cards first became widespread during the 1970s. By the beginning of the 198 0s, the major credit card companies began seeking methods to reduce p rocessing costs and losses due to fraud. In 1981, Visa and MasterCard began offering merchants discounts on their transactions if they agr eed to use newly developed automated transaction technology for all c redit card purchases greater than $50. This move opened the way f or the creation of an industry devoted to producing POS authorization systems. Early systems typically had starting prices of $900.
VeriFone introduced its first POS product in 1982. By slashing operat ing costs and lowering manufacturing costs by outsourcing production, VeriFone brought its first system to the market at $500. In fina ncing this effort, Melton received help from Lexis-Nexis founder Will iam Gorog, who had sold that company and founded Arbor International to produce credit card authorizations systems under contract for Tymn et. When Tymnet management decided not to pursue the POS market, Goro g agreed to finance VeriFone with letters of credit. He next brought VeriFone in contact with a venture capital firm for additional financ ing. In return, Arbor received the right to sell VeriFone products ea st of the Mississippi.
Working with Visa, VeriFone quickly captured a strong share of the PO S market. In 1984, however, the company took a major step toward achi eving industry dominance with the introduction of its ZON credit card authorization system, which, taking advantage of improvements in pro cessor speeds and the lowering cost of both processors and memory, co st as little as $125, making it easier to convince retail merchan ts to install the system in their stores. The following year, the com pany's revenues grew to $15.3 million, earning a net profit of &# 36;864,000. In that year, VeriFone moved its headquarters to Redwood, outside of San Francisco, to be closer to that area's software and h ardware engineering talent pool, as well as to its customers and inve stors.
The company doubled revenues, to about $30 million, in 1986. But VeriFone's products were beset by quality problems, the company was b arely producing profits, while in constant need of new financing, and investors were critical of the company's management. As one early in vestor told The New York Times, VeriFone was led by "managemen t by reactive panic mode." The venture capitalists behind VeriFone ur ged Melton to bring in a new president and CEO.
Melton chose Hatim A. Tyabji. Born in Bombay, India, Tyabji had moved to the United States at the age of 22 to attend graduate school, eve ntually earning two graduate degrees. Tyabji joined Sperry Corporatio n as a junior project manager, but in 13 years rose to become preside nt of information systems products and technologies. When Sperry was bought up by Burroughs Corporation, forming Unisys Corporation, Tyabj i decided to leave. Named president and CEO of VeriFone, Tyabji worke d to turn the company around. Quality problems were quickly addressed ; by 1988, Tyabji moved to create manufacturing as a core competency, opening VeriFone's first manufacturing plant in Taiwan. The company also acquired Arbor International, for an exchange of stock, giving i t full control of marketing and sales of its products. Tyabji sought to transform the company into Melton's original vision of a virtual o peration. Laying down a corporate philosophy, Tyabji encouraged the g rowth of the company's computer network, outlawing paper-based commun ications and mandating that employees make constant use of the networ k's e-mailing and database functions. Employees and operations were p laced close to the company's customers, enabling Tyabji to institute what the company calls its "culture of urgency," allowing for 24-hour -per-day product development and sales and marketing efforts.
By January 1988, VeriFone controlled more than 53 percent of the POS systems market. Revenues had reached $73.4 million, with net earn ings of more than $6 million. The following year, the company inc reased its dominance in the industry with the purchase of the transac tion automation business of Icot Corporation, then second in the mark et with a 20.5 percent share. The acquisition boosted VeriFone's reve nues to $125 million. By then, VeriFone had entered the internati onal market, starting with Australia in 1988 and placing its milliont h ZON system in Finland in 1989. Tyabji added chairman to his titles after Melton retired from the company in 1989, taking a seat on the c ompany's board.
New Directions for the 1990s
VeriFone went public in March 1990, raising more than $54 million . As the credit card industry matured, VeriFone pushed to install its systems into new markets, such as restaurants, movie theaters, taxis , and fast food restaurants, while developing software capacity to br ing its systems into the health care and health insurance markets and to government functions, such as state welfare systems. Internationa l sales also began to build, as use of credit cards became increasing ly accepted in foreign markets. VeriFone was also building its global operation, opening facilities in Bangalore, Singapore, England, Dall as, and Ft. Lauderdale, in addition to its Hawaii and California faci lities. Rolling out its Gemstone line of transaction systems, which a dded inventory control, pricing, and other capabilities, VeriFone was aided by announcements from Visa and MasterCard that the companies w ould no longer provide printed warning bulletins, while requiring mer chants to seek authorization for all credit card transactions by 1994 .
These moves further stimulated demand for VeriFone's products. Revenu es jumped from $155 million in 1990 to $226 million in 1992. By then, VeriFone had placed its two millionth system (in Fouquet's r estaurant, near Paris, in 1991); by 1993, VeriFone systems were in pl ace in more than 70 countries, including its three millionth system, in Brazil, representing the company's expansion in the Latin American market. International sales, which had contributed less than 10 perc ent of revenues before 1990, now accounted for more than 30 percent o f the company's nearly $259 million in annual revenues.
New opportunities arose as banks began rolling out debit cards in the mid-1990s. VeriFone was quick to launch itself into this new market, producing terminals designed with key pads for customers to punch in their PIN numbers. But as the domestic credit and debit card markets neared saturation, VeriFone made ready to launch itself in new direc tions. While continuing its international expansion, topping four mil lion installed systems in 1994, and maintaining its manufacturing cap acity, doubling production capacity with a new plant near Shanghai in China in 1994, VeriFone had already evolved its primary focus to pro ducing software applications, offering vertically integrated systems solutions, including applications for standard computer operating sys tems.
VeriFone moved to take the lead in the coming smart card revolution, teaming up with GemPlus, a France-based maker of the cards, and Maste rCard to form the joint venture SmartCash. Smart cards replaced the m agnetic stripe of typical credit cards with tiny processors. The chip s, which could contain as much as one megabyte of RAM, could be encod ed with a variety of information, such as the amount of money availab le to the cardholder. Purchases made using a smart card were automati cally deducted from the holder's account. Transactions were immediate , require no authorization, and thus enabled the card to be used in l ow denomination purchases that would be too expensive or time-consumi ng with the typical credit or debit card. In addition, smart cards co uld be encoded with much more information, including a person's healt h insurance information, as well as that person's various credit card accounts.
To place the company close to technological developments in France an d the rest of Europe, VeriFone opened its Paris research and developm ent center in 1994. The company launched its smart card in May 1995. The company introduced its Personal ATM, a palm-sized smart card read er capable of reading a variety of smart card formats, in September 1 996, with the product expected to ship in 1997. Among the first custo mers already signed to support the P-ATM were American Express, Maste rCard International, GTE, Mondex International, Visa International, W ells Fargo Bank, and Sweden's Sparbanken Bank. Contracts for each cal led for the purchase of a minimum of 100,000 units; the total market potential for the device was estimated at more than 100 million house holds. In addition, VeriFone began developing smart card readers to s upplement and eventually replace its five million credit and debit ca rd authorization systems.
In 1995, VeriFone began the first of its aggressive steps to enter an entirely new area, that of Internet-based transactions. In May 1995, the company partnered with BroadVision Inc., a developer of Internet , interactive television, computer network, and other software, to co uple VeriFone's Virtual Terminal software--a computer-based version o f its standard transaction terminal--with BroadVision's offerings, th ereby extending VeriFone's products beyond the retail counter for the first time. In August 1995, however, VeriFone took an even bigger st ep into the Internet transaction arena, with its $28 million acqu isition of Enterprise Integration Technologies, developer of the S-HT TP industry standard for safeguarding transactions over the World Wid e Web. VeriFone followed that acquisition with a $4 million inves tment in William Melton's latest venture, CyberCash Inc., also workin g to develop Internet transaction systems.
By 1996, VeriFone was ready with its Payment Transaction Application Layer (PTAL) lineup of products, including the Virtual Terminal inter face for merchants conducting sales with consumers; Internet Gateway or vGATE, to conduct transactions between merchants and financial ins titutions; and the Pay Window interface for consumers making purchase s on the Internet. After securing agreements from Netscape, Oracle, a nd Microsoft to include VeriFone software in their Internet browsers, VeriFone and Microsoft announced in August 1996 that VeriFone's virt ual point of sale (vPOS) would be included in the Microsoft Merchant System to be released by the end of the year. VeriFone's announcement of the P-ATM, able to be attached as a computer peripheral, wedded t he company's smart card and Internet transaction efforts.
The success of these ventures depended on the long-term acceptance of the new technologies, and VeriFone faced powerful competition as the industry struggled to achieve international standards and specificat ions. However, with Hatim Tyabji leading the company in its culture o f urgency, VeriFone hoped to become as ubiquitous on the screen as it had become on the store counter. During the late 1990s, "transaction automation," as the company called its industry, would become increa singly less reliant on physical products and instead turn to a virtua l realm where cash would perhaps become obsolete. VeriFone was at the forefront of this transition, shifting its own emphasis from manufac turing hardware to designing complete software solutions.
Changes in the Late 1990s and Beyond
While technology was changing at breakneck speed during the late 1990 s, VeriFone worked to stay ahead of the game. Its position in the bur geoning industry and strong revenue growth made it an attractive take over target for Hewlett-Packard Company (HP). At the time, HP was loo king to tap into Internet commerce and believed VeriFone could be its next cash cow. Thus HP made a $1.3 billion play for VeriFone and completed the deal in 1997. Tyabji retired shortly thereafter, leavi ng Robin Abrams--the first woman to head VeriFone--at the helm.
As a division of HP, VeriFone continued to develop new products and s ervices. The company launched its Omni 3200 payment terminal in 1999 and it quickly became its best selling terminal to date. The group al so developed an integrated payment solution and a new global payment platform.
While VeriFone's future looked bright, the company began to face chal lenges in the new millennium. Profits began to suffer as intense comp etition and ever-changing technology demands ate away at its bottom l ine. With VeriFone's market share falling, many analysts began to spe culate that its union with HP had been a mistake. Sure enough, HP ann ounced a major restructuring effort in 2001. As part of its reorganiz ation, it sold the VeriFone division to buyout firm Gores Technology Group, which was led by Douglas G. Bergeron. Bergeron summed up his t houghts on HP's management of VeriFone in a September 2001 Bank Ne twork News article claiming, "They gummed it up with H-P bureaucr acy and sucked the entrepreneurial oxygen out of it."
Under Bergeron's leadership, VeriFone quickly returned to profitabili ty by focusing on its POS products and services. During 2002, Bergero n and venture capital firm GTCR Golder Rauner LLC recapitalized VeriF one. When the dust settled on the deal, Bergeron was left as the comp any largest private investor while GTCR retained a controlling intere st. VeriFone Holdings, Inc., was created to oversee the operations of VeriFone Inc.
With the changes in management behind it, VeriFone was left to focus on the future. VeriFone began to tap into the quick service restauran t and drive-thru industry in 2003 as fast food establishments began t o allow customers to pay with credit and debit cards. The company als o launched several new versions of its Omni payment terminal, worked to shift Food Stamp benefits from a paper-based system to an electron ic benefits transfer program, and partnered with McAfee to develop vi rus protection for POS payment terminals.
Bouyed by strong sales and profits, VeriFone launched an initial publ ic offering on the New York Stock Exchange in April 2005. The company also launched its MX870, a new secure payment product for multi-lane retailers with video and sound that allowed for branding, promotion, and advertising at the POS terminal. VeriFone had recovered from the problems it experienced as a division of HP. Keeping up with technol ogical demands while fending off competitors remained at the forefron t of VeriFone's strategy. With a strong hold on the U.S. market, Veri Fone management hoped to increase its overseas market share in the ye ars to come.
Principal Subsidiaries: VeriFone Inc.
Principal Competitors: Hypercom Corporation; Ingenico S.A.; NC R Corporation.
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