Prologue: Doug Bergeron’s VeriFone Departure

Doug Bergeron, VeriFone CEO

I recently received an email from a source who claims he works at a hedge fund that shorted $PAY based on what he found strange and difficult to explain about the former CEO’s behavior.

Here’s the conversation:

Sean,

Here’s the article. FYI I work at a hedge fund and we were short PAY. Part of the qualitative aspect of my research involved a newsrun of Doug Bergeron and it stood out as particularly bad, this being the biggest example. Other quotes throughout the years didn’t seem based in reality either, esp some things in their presentations not squaring with sec filings either. No smoking gun, just a lot of things that were odd at best.

Doug has a long history of badmouthing competitors that goes way past the Hypercom acquisition, and his personal battle with Square.

Indeed, he has a reputation for being cutthroat.

When I profiled him last year, he boasted of how he ruthlessly cut the headcount at VeriFone just as soon as he got in the door.

(A story I was forwarded as a part of the email):

Bergeron’s Competitors Beg To Differ.
486 words
7 November 2002
Card Technology News
English
(c) 2002 Faulkner & Gray, Inc. All rights reserved.

While most CEOs leave it to underlings to criticize the competition, Doug Bergeron has made that task part of his job description since taking over as CEO of VeriFone last year.

In recent conversations, he has kept up on his attacks on his two major rivals, Hypercom Corp. and Groupe Ingenico. Besides asserting there is “management chaos at Hypercom,” he also argues that Hypercom’s own financial reports suggest that VeriFonehas overtaken Hypercom in terminal shipments.

Bergeron’s argument is that VeriFone generated nearly $340 million in revenue in the 12 months before it was acquired this summer by venture capital firm GTCR. Bergeron claims Hypercom’s annual terminal revenue is only about $200 million, once you subtract the company’s businesses in leasing and its sales of controllers for merchant terminal networks.

Hypercom, which unlike VeriFone is publicly traded and thus required to disclose detailed financial data, reported $292 million in 2001 revenue, of which 9% came from its leasing business. The company does not break out its network controller sales.

Beyond that, Hypercom Chairman and CEO Chris Alexander says, “It appears thatVeriFone is obsessed with Hypercom.” Alexander says Hypercom is only “obsessed” with serving its customers.

Turning to Ingenico,  Bergeron points out that the France-based terminal manufacturer recently hired as its chief technology officer, Eric Lecense, the former head of research and development at VeriFone. Bergeron says he fired Lecense on his first day atVeriFone. “He is a walking R&D disaster,” Bergeron says.

L. Barry Thomson, president and CEO of Ingenico Inc., the U.S. subsidiary of France-based Ingenico, says Ingenico selected Lecense after an extensive executive search, in which Lecense was widely praised by customers and colleagues.

Thomson also takes issue with Bergeron’s claim that VeriFone has shut Ingenico out ofVeriFone’s key North American markets. Thomson points to Ingenico’s announcement in September of a partnership with Heartland Payment Systems, the kind of terminal reseller Bergeron is focusing on. Ingenico also has announced deals with two of the largest U.S. payment processors, First Data Corp. and Concord EFS.

Thomson accuses Bergeron of making brash statements to cover up VeriFone’s problems. “He’s sold a bill of good to his new owners, and he’s trying to create a false market awareness to keep everybody happy,” Thomson says.

Critics also suggest Bergeron only was able to improve VeriFone’s financial results by layoffs. They say the downsizing is now affecting VeriFone’s ability to compete. (Bergeron has said he laid off more than 250 employees in his first few months on the job, reducing VeriFone’s head count to about 1,000.)

In the end, though, none of these CEOs will be judged by how well they spar verbally. Market share and profits will be the key metrics.

(c) Copyright 2002 Thomson Media. All Rights Reserved.

This person describes what he thinks is further shady behavior, here:

I don’t know what his agenda was back then re affecting the stock, I just know it was poor form to badmouth somebody like that

In general, I’ve never met Doug, just asked question once at a conference.

If you go back and look at their last few 10ks there’s increasingly worrisome commentary in the risk factors about international competition and pricing, which appears to be part of the recent blowup.

Also the unnecessary belittling of Square was foolish. If you’ve read innovators dilemma he sounds like “guy about to get disrupted but doesn’t know it yet 101”. The interesting thing is I don’t think square has much to do w recent problems at PAY, at least yet.

Also, Point, the biz they bought 18mos or so ago I don’t understand the model economically. Plus he’s publicly referred to it as a 30% or so ebitda margin business but Point’s standalone filings were not close to that. I never got a clear answer from the company that bridged the gap when I asked them about it, which was a big reason we were short, bc it was a key part of the PAY margin expansion thesis.

Here’s a couple other things.  First is the change in risk factors around emerging markets.  The second is a collection of curious quotes that were part of my original report.

Meanwhile, re: emerging markets on 3/29/12, Doug said “But if you can read body language, I’m feeling really good about the business.  We have a phenomenal—I’m feeling very good about this.  We have phenomenal presence in the emerging markets.  I hear China slowdown, I say what slowdown?”

Also about the profitability of the business they acquired, on 5/24/12 earnings call, he said “Well, Point operates, as we’ve indicated before, at plus 30% operating margin…”.   I still have no clue where that comes from, I calculated Point’s standalone financials, which were discreetly released in an 8k, and I calculated LTM 9/30/11 operating margins (commonly referred to as EBIT) at 10.8%.  EBITDA margins, not typically referred to as operating margins were 26.3% by my math.  When I asked about it at the 9/13/12 Goldman conference, he actually said 37% EBITDA but didn’t explain the jump from standalone.  That transcript is also in the public domain.
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