For VeriFone, Going Public Lands a Capital Windfall

  Taking a company public carries risk, and it can be expensive. But, as an astrologer might say, when the planets align just right, positive things can happen, too.
  That being the case, executives at VeriFone Holdings Inc. must feel as thought they are living in the Age of Aquarius. Since the San Jose, Calif.-based point-of-sale terminal maker's initial public offering of $10 per share April 29, 2005, the company's stock tripled in value, selling for about $32 per share in early June. The stock price closed at $28.03 per share on June 21.
  Are VeriFone products that much better than those of its competitors? Is VeriFone managed better than other terminal makers? Or did the company simply luck out with the timing of its initial public offering, as the value of U.S. stocks generally has increased considerably over the past year?
  Industry observers attribute VeriFone's positive stock performance to a bit of each.
  "The market over the period certainly has performed better than it had for years prior," says Robert Dodd, a senior analyst who covers VeriFone and competitor Hypercom Corp. for Memphis, Tenn.-based investment group Morgan Keegan & Co. Inc. "But most of [VeriFone's success] is the performance of VeriFone itself."
  (The Dow Jones Industrial Average, a stock market index that consists of 30 of the largest and most widely held public companies in the United States, has risen about 16% since spring 2005.)
  VeriFone has outperformed its main rivals-Hypercom Corp., Ingenico and Lipman Electronic Engineering Inc.-and has done so consistently in an industry where there is no nonrecurring revenue, Dodd notes. "They need sales every month to make money, and VeriFone has delivered beyond expectations," he says.
  VeriFone Chairman and CEO Douglas Bergeron contends that is the main reason for VeriFone's performance. "For the five quarters that we've issued numbers, we've exceeded analysts' projections each time," he says. "If you do that, your stock price goes up. It's not magical, really."
  Bergeron notes that since VeriFone went public, its expenses have risen. These costs include those applied to comply with the Sarbanes-Oxley Act, which holds public companies' leaders accountable for the accuracy of the information they report, and to other requirements not applied to private companies. "The cost to go public is a regressive tax," Bergeron says. "But we saw growth, we saw extremely respectable profitability and we saw scale, so we pulled the trigger on it."
  And as VeriFone's stock price has gone up, it has provided the company with capital to invest in various projects. These include multimedia systems software for multilane retailers that accommodates streaming video, and advanced wireless terminals, including one of the smallest that comes with an attached printer, the Vx 670, which debuted this past spring.
  VeriFone also has used the extra funds to make purchases. VeriFone in April agreed to buy Lipman in a deal valued at $793 million that is expected to close by Oct. 31 ("Terminal Maker VeriFone to Buy Lipman," May).
  While Bergeron says VeriFone could have made the deal before the IPO, he is unsure Lipman's leaders would have welcomed a private firm buying the company. "When selling a company, it's an emotional experience, and you want to join a winning team," he says. "Being a public company, with our track record, growth and stock-price appreciation, gave Lipman's leaders a feeling of being part of a winning team."
  Stephen Mott, CEO of Better Buy Design, a Stamford, Conn.-based payments-industry consultant, says the market may be witnessing the true potential of a company kept at bay by its former owner, Hewlett-Packard Co. H-P sold VeriFone in 2001 to Gores Technol-ogy Group LLC, led by Bergeron. Bergeron secured capital for VeriFone at the time from GTCR Golder Rauner LLC, which today remains the company's largest stakeholder.
  "People who knew the business were sat on," Mott says of H-P's handling of VeriFone. "When the company did its IPO, they really got unleashed. The difference in the performance of the stock price is really striking, and it shows they are uninhibited when going after the market."
  Mott also credits VeriFone's success to the company's Omni 3750 payment terminal. "The 3750 ... has proved to be highly flexible," he says. "As merchants' needs get more complex, they're able to leverage the investment in that terminal and add the programs and applications in a very straightforward way."
  The Omni 3750, which has built-in magnetic stripe and smart card readers, an internal PIN pad and a thermal printer, runs VeriFone's Verix multiapplication architecture. This enables the terminal to support multiple applications, including prepaid phone card programs, loyalty initiatives, gift cards and age verification.
  Bergeron sees little in the way of continued growth. "There were 10 million systems in the U.S. that VeriFone had sold in the 1990s that were dial-up," he says. "We saw the beginning of a decade-long ability in 2004 to replace those systems" with high-speed, Internet protocol-based ones. Bergeron prices the value of those replacements at $3 billion.
  Moreover, Bergeron says, payment card acceptance is proliferating into areas of the economy where it previously did not exist, including tollways, parking lots and taxis. "We are going to spread like locusts our technology into all these areas over the next 10 years," he says. "I see great growth for VeriFone as a result of that."
  Bergeron quips that investors in rival Hypercom, which has struggled to regain its 1998 IPO stock price of $16 per share, must be gasping for air. "The initial investors have been under water for eight years. I wonder how long they will suffer that," he says. "It's painful to hold your breath for eight years."
  For its part, though, Hypercom, which for years struggled with corporate-leadership issues, has been in the midst of its own comeback. In late October, the company's stock was selling for less than $6 per share. (It sold for less than $2 per share at one point in 2002). In May, Hypercom stock was selling for more than $11 per share, though the price closed at $9.06 on June 21.
  "The stock price is reflective of investor appreciation for the work we've done so far and their confidence in the company's ability to improve," says William Keiper, who took over as Hypercom's CEO in March 2005. "We expect that we will continue to improve sequentially in revenue and [earnings per share] quarter by quarter, but we can't say by how much."
  Those factors, he says, include continued migration from the use of cash and checks to electronic payments, the emergence of electronic payments in such large countries as China and India, continued adoption of new security and interoperability standards, and such technology innovations as IP connectivity, wireless terminals and contactless cards and readers.
  "Those four represent growth drivers for the industry sector overall," Keiper says. "Personally, I believe the factors driving growth are as good as any in the last 10 years."
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