Why Verifone needs to go private despite its recent turnaround

The $3.4 billion deal to take Verifone private is more than just an effort to strengthen the company by placing it alongside the many other payments-related technology holdings owned by Francisco Partners. It's also a signal of how much the market has changed from the days when Verifone found itself scrambling to combat a newcomer called Square.

Verifone's attractiveness to Francisco is partly a testament to CEO Paul Galant's turnaround. Galant became CEO of Verifone in 2013, taking over a company that was struggling financially and technologically, suffering from what Galant called "self-inflicted wounds" such as missed deadlines, poor customer service and even prohibited business dealings in Iran.

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The mobile point of sale market grew by preying on these weaknesses. Square's pitch was less about technology and more about ease of access — small merchants that didn't want to contend with Verifone's customer service issues could instead pick up a card reader at any convenience store for just $10. Verifone tried to match this with products like PayWare Mobile and Sail, but neither device reclaimed much ground against Square.

Verifone's turnaround was gradual, but in the past two years it has sharpened its move from payment terminal-based company to a software provider. The strategy is showing some effect, despite headwinds from the EMV migration, as CEO Paul Galant noted in the company's most recent earnings report on March 8. In addition to reporting solid earnings, Galant noted progress in expanding Verifone's multichannel and digital capabilities.

The deal with Francisco Partners will make Verifone a privately held company, and will also allow it to accelerate its strategy in a dynamic merchant acquiring industry that looks much different than it did as recently as five years ago, with billions of dollars in acquisitions and investments birthing a tech revolution. The deal includes Verifone's debt, and is expected to close in the third quarter. Verifone's board has approved the deal, which includes a "go shop" period through May 24, meaning it's possible another company could come in with a better offer.

Verifone's traditional rival, Ingenico, has also bulked up through the M&A market, acquiring the Swedish digital payment company Bambora in 2017 in a $1.7 billion deal to accelerate Ingenico's diversification beyond terminals. Ingenico later bought Paymark to add clients in New Zealand and Airlink to expand in Asia.

But Ingenico and Square are only two examples of the substantial pressure Verifone faces. Stripe's API has swept the market for digital payments, giving merchants a low-touch alternative to both Verifone and Ingenico. Stripe's valuation of more than $9 billion looms over traditional acquiring like a hammer.

And Stripe's not alone. PayPal's Braintree has expanded rapidly over the past three years by tying PayPal's digital transfers to Braintree's open development tools.

Verifone and Francisco did not return requests for comment on Monday night.

For Verifone's part, it's kept up by pushing the adoption of Verifone Connect, its new cloud-based omnichannel digital services platform, connecting its 30-million-device footprint through Verifone's gateway and expanding use of its Carbon digital payments system.

By coming under Francisco's investment umbrella, Verifone will have plenty of potential partners, some of which Verifone is already working with.

These companies cover multi-channel support for EMV, mobile payments, omnichannel shopping, quick service payments systems, gateway, ISO sales and authentication/security. Verifone has been building out its business in all of these areas, so gaining a roster of easy-to-integrate collaborators will place Verifone and Francisco's other holdings in front of merchants in dozens of countries, in nearly every category and almost all sizes.

The San Francisco-based Francisco Partners formed in 1999, has raised more than $14 billion in capital and has invested in more than 200 technology companies. Other investors in the Verifone deal include British Columbia Investment Management Corp., a Canadian institutional investor.

Francisco has invested in many health care companies, and it has several fintech companies in its portfolio of current investments. These companies include 2Checkout, a global online and mobile payment technology company that's now a unit of Avangate, providing access to cross-border e-commerce, an increasingly popular option for online merchants that sell in multiple countries with a single location.

Francisco's holdings also include Paysafe, a Houston-based company that provides connections for mobile wallet, online payments and other digitally focused merchant services. Paysafe is already collaborating with Verifone to sell Verifone's Carbon and Engage terminals through Verifone Connect, powering business, marketing and loyalty programs.

Another Francisco holding, NMI, develops technology that supports ISOs, independent software vendors and payment facilitators to offer branded payment gateway services on a white label basis. NMI just purchased Creditcall to add single-platform support for retail, e-commerce, mobile and unattended payments.

Other collaborations with Francisco portfolio companies could come from Dynamo, a CRM and reporting company; and OneIdentity,an authentication company. Prosper, a P2P lending company founded by Chris Larsen, who later went on to head Ripple, is also in Francisco's current stable.

Each of these companies touch on some or all of Verifone's diversification needs.

Verifone is still grappling with the U.S. EMV migration, which also influences merchant and ISO adoption of contactless payments. The company is also partnering with banks to extend mobile payment acceptance in Europe, and is expanding its embrace of open development and the use of marketing and media content to offset the gas station EMV migration.

In an earlier interview, Thad Peterson, a senior analyst at Aite Group, said "the industry seems to be consolidating around the idea of a single source for payment capabilities, probably driven by the demand for an omnichannel and cross-border capability that's being demanded by merchants of every size. The payment industry is adapting functionality to address the radical shift in e-commerce."