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Growing through M&A in Financial Services

Pursuit of innovation is crucial in the competitive global market.

This interview is part of the Inside the Mind of the CEO series, which explores a wide range of critical decisions faced by chief executives around the world.

Gary Norcross is president and chief executive officer of Fidelity National Information Services (FIS). Based in Jacksonville, Fla., FIS has evolved — through a combination of aggressive acquisitions and organic growth — into a major player in the global market for providing technology solutions to the financial-services industry. Just months after taking the helm in January 2015, Norcross engineered the US$9.1 billion acquisition of SunGard, a financial software and technology services company. He is navigating a period of intense interest in the products and services that FIS provides, as demand grows for real-time payments and greater transactional security. In a conversation in late 2017 with Pierre-Alain Sur of PwC and Daniel Gross of strategy+business in his office overlooking the St. Johns River, Norcross described how this incumbent is coping with disruption and fueling innovation.

S+B: FIS’s story has been one of significant growth over the years, driven in large part by mergers and acquisition: Alltel Information Services in 2003, Metavante in 2009, SunGard in 2015, and, in between, a succession of smaller deals. What is FIS’s M&A strategy?
A lot of people would say we’re an inorganic company because we have had a tremendous number of acquisitions. At the highest level, that’s true. But I tell the following to my leadership team all the time — and we talk about it across the company: In order for us to be able to continue doing inorganic deals, we have to perform organically. Organic growth and organic execution give you permission to consider an inorganic opportunity.

Companies that are pure-play acquisition companies will buy multiple assets with a lot of overlap, run them highly independently, and get a thin leverage out of some infrastructure functions. If you get those types of companies at a very low valuation, it’s a good strategy. But dating all the way back to the time of Alltel Information Services, our acquisition strategy has been to find companies that serve financial-services institutions that bring a new product or a new service to an existing market we serve, or that break us into an adjacent market within financial services that we view as strategic. The perfect scenario is both. If we can find the scenario that fits that strategy and it works financially, then we’ll jump in with both feet.

S+B: Do you have a set of specific financial metrics you look at?
Not necessarily. It can be the best financial deal on the planet, but if it doesn’t fit our strategy of bringing a new product or a new service that allows us to cross-sell or upsell our existing clients, if it doesn’t break us into an attractive, adjacent market, we’re not interested. Which means in the industry today there’s just a lot of tire kicking. I think people get frustrated at times with us because people will bring us these “fantastic deals,” and I’ll look at one and say that it doesn’t fit our strategy. We’re not interested in that market segment, and it would be a distraction for us. Integration would be impossible because we don’t understand it. Over the years, we’ve made a couple of decisions that were really close to that line. And I’ll tell you, in every one of those we struggled with the integration of them.

S+B: So how do you get a head start on integration?
It starts early. Cultural alignment comes out through due diligence. It really is your opportunity to hear how people think about their business and where they’re going to take it. And to be honest, if you don’t have strong cultural alignment, at a minimum you have to be very aware of that with regard to your integration plans.

I’ll give you a great example. Metavante was a fantastic acquisition for us. We knew the cultural alignment piece was going to be the toughest thing with them. They had grown inside a large financial institution and had recently spun out — so they had a banking culture, while we grew up as a technology company. There were areas they were focused on that a financial institution would focus on, but that didn’t materially convert to revenue or profit. They spent disproportionately on client management compared with what we spent. And we spent far more on sales and go-to-market and growth than they did. When you’re housed within a financial institution, you can afford to spend less on that. You have different objectives. It doesn’t make one bad and one good. What we did was bring both of those to an equilibrium. We raised our game on client management, and the acquired business pulled in a much larger sales force and was therefore able to accelerate the growth curve.

S+B: What do you do to make sure you hit the ground running?
Between the signing and the close of a deal, a lot of heavy lifting goes on. We put together very robust teams on both sides and put them in rooms together. We really do a bottom-up build — IT, product, and so on. The result is that in our last two large transactions, before we got to the close, we announced the organizational structure. Everybody knew the exact framework, the team that was going to be in position going forward. That way, we minimized confusion.

To say it a different way, if we closed on large acquisitions and they remained independent within FIS for a period of time, we would be spending all of our time dealing with clients and product teams, establishing internal objectives. And it would just be highly confusing. With our approach, by the time we close we’re able to start implementing those plans — which we typically do over a two-year period.

S+B: The acquisition of SunGard, a $9.1 billion deal, coincided pretty closely with your becoming CEO. Take us through that.
I had been in the seat almost a year by the time we closed the transaction. It was the largest acquisition in the company’s history, but definitely the first large transaction done since I had been CEO. The good news for us was a couple of things. One, our team had been together for a long time, so it was already well gelled and very focused on the strategy. Frank Martire [the prior CEO] and I had been working on my transition to CEO for two-plus years. And Frank also moved from CEO to executive chairman, so it wasn’t like he disappeared. I don’t want to say it was business as usual, because it’s always different when people [take on] different roles. Two, the strategy hadn’t changed. Our playbook on how to integrate these companies had not changed. Our due diligence had not changed. When we bring an opportunity like this to the board, they see how it fits in the overall strategy, and the results of that historically have spoken for themselves.

S+B: Lots of companies use M&A as a way of dealing with disruption. It’s how they stay plugged in, or acquire new products, or even just gain individuals who can spark change. Is M&A the main route to innovation?
We think of innovation a little differently. There is definitely a lot of disruption coming in the industry. So how does FIS think about that disruption, and how do we keep from being disrupted? You’re a large company, you’ve got large market share. You continue to try to grow that. M&A plays a role. But it’s not the only way. You’ve got to have a team that realizes that, especially in this market, in this industry, the status quo is not going to be acceptable. So you first have to admit that there are ways of doing business differently, and there are new products and services coming in the industry very quickly.

“Most people will tell you that if you get one out of 10 of the participants funded out of an accelerator, that’s a pretty good rate. Out of our first round, seven out of 10 received funding.”

We invest heavily in existing products and services, and in new products. In the past, these investments were 5 percent of revenues. It’s moving closer to 7 percent of revenues. But if you’re not careful, that investment will be channeled to maintain the business-as-usual scenario. Over the last several years, we’ve tried to swing our investment, from [putting] the majority of it toward maintenance to [putting] the majority of it toward innovation. We’re already deploying our third-generation digital platform. At the end of this year, about 50 percent of our domestic computing will be in cloud-based technologies; three years ago, it was zero. And we’re at the forefront of rolling out next-generation payment capabilities.

S+B: Do you look outside for help?
We know we can’t invent everything ourselves. Starting in 2008, we began to do venture capital–like investments, although we don’t have a fund. We invest in the B-round of early-stage startups that have a product, but that need customers. We’ll make an investment, take a board seat, and allow our customers to understand how early-stage they are. The biggest home run was mFoundry, which we invested in during 2008. Nobody knew what mobile banking was going to be. We pivoted it to the right direction. And in 2013, we ended up acquiring the 78 percent of the company that we didn’t already own. Now it has 40 million consumers using its system.

S+B: You’re a big company with a lot of resources. Why not just hire some engineers and develop these products yourself?
First, we wouldn’t be taking enough risk in those scenarios. You have to place 10 bets to get one win. When you buy these companies and put them up under your infrastructure, there’s a higher level of policy implementation and oversight that can actually stifle creativity. So you want them outside the company. We take this approach for investments that are five years out. The VC Fintech Accelerator is for bets 10 years out. Finally, when either we are late or we conclude we have missed an opportunity, for whatever reason, we’ll do a tuck-in acquisition to catch up or accelerate our own path. We saw a significant opportunity in real-time payments. Clear2Pay, a startup based in Brussels, was way ahead of us on that front. We saw an excellent opportunity to leapfrog where all of us were and do a strategic acquisition. We missed the company in the early-stage startup phase, to be brutally honest. But it had really gained some traction in the global tier banks, and that was our opportunity to step in. [FIS acquired Clear2Pay for €375 million (US$513 million) in 2014.]

S+B: Can you talk a little bit more about the VC Fintech Accelerator, which is in a somewhat surprising locale: Little Rock, Arkansas?
It’s different from most accelerators you’ll think of. This isn’t a bunch of people with very, very deep pockets coming together trying to find the next Google or Facebook. This is one of the largest financial technology providers in the industry today looking for its own next great idea to deliver to clients.

We decided to put it in Little Rock for a couple of reasons. One, we started the company there. And two, we have a large executive presence still at our campus in Little Rock. And part of the value we bring is access to clients and access to our executives to help these teams build out their ideas in financial services.

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The reality is, the applicants actually come from all over the world, although they’re heavily weighted toward the United States. Most people will tell you that if you get one out of 10 of the participants funded out of an accelerator, that’s a pretty good rate. Out of our first round, seven out of 10 received funding. Then we got 250 applicants for our second round, and already more than five have been funded. And some of them don’t get funding from us. Other people actually step in. Our ability to bring these companies in for a very intensive process, exposing them to our clients for input and feedback, is really a great benefit. And that’s why people will travel anywhere if they’re interested in financial services and they’ve got a good idea to get access to that. So don’t get hung up on location.

We also have several hundred people in an innovation lab in Silicon Valley, which is focused on digital and digital financial services. And our innovation lab in Bangalore, India, is focused on the underserved market, financial inclusion, as you would expect. We put our innovation labs in places that are appropriate spots to gain resource talent. But we do drive them on specialties.

S+B: It’s really a global and multipronged approach to handling disruption.
You need to cover all the bases. And we still miss opportunities, and we try to learn from those situations. But between internal investment, minority investments with a long-term view, and inorganic activity, we’re obviously working hard to stay ahead of the competition and the disruption going on in the industry. And our clients want and expect us to do that.

S+B: One way to deal with disruption is to get more exposure to rapidly growing international markets. You have a presence in more than two dozen countries. But the total revenue is still heavily driven by the U.S.
Twenty-seven percent of our revenue is now outside the U.S., and it’s growing rapidly. We actually launched our non-U.S. business in the late 1980s, and I will tell you it felt like more of a hobby for the first decade or so. Leading up to the time I became chief operating officer in 2007, we were very focused on the next country, whatever country we could enter. We had great pride in announcing “we’re now in this next country.” But when I became COO, and had the first opportunity to really focus on our global business, I had a realization. In the non-U.S. businesses, growth was great, but profitability was very tough. The worst thing to do is to come in and sell a product one time in a country, and only one time. Because now you’ve won the transaction, you spent all the money to localize it, and you never get to reuse all that localization. So in 2007 we pivoted and we focused on a subset of countries. We decided to look at seven to 10 of them and go wide and deep in those countries. It was a big risk for us, but it ended up paying big dividends. We were able to maintain our growth rates, and our profitability really started coming up in a nice way.

We accelerated that dramatically with SunGard. Before SunGard, we were at about 22 percent of total revenues outside the United States. And SunGard had about 30 percent of revenues outside the United States. The nice thing about SunGard is that for a lot of the capital markets, which it targets, there is a global solution set. As a result, we’ve seen the growth rates of the international business continue to be strong and we’ve seen the profit margins rise.

We’ve broadened over those seven to 10 countries now, because SunGard had some critical mass in some countries that we didn’t have. But it takes a lot of discussion for us to really go enter into a new country now. It’s got to be a very specific set of circumstances, such that we see it as an opportunity to expand that strategy and go wide and deep.

S+B: When we ask CEOs, especially those in North America, how they feel about the economy for the next one to three years, they’re generally quite positive. But they’re generally less positive about the prospects for their own companies’ revenues in that same time period. What accounts for that dichotomy? And do you feel that way as well?
Well, I think everybody always wants to be positive. So everybody is always going to feel a little better about the things they don’t know about — like the global economy. And everything they know intimately they’re going to feel a little worse about because they know every single pitfall that they’re having to deal with.

I see FIS and the economy in very similar ways. I would argue this has been one of the slowest economic recoveries we’ve ever seen. And I don’t think that recovery is going to accelerate. I don’t think it’s going to decelerate. We’re still seeing a slower recovery. We’d still love to see some more recovery in Europe. As we’ve looked at Brexit being implemented, we feel there’s a hesitancy in deploying capital by the major players there. Overall, I still think we’ll continue to see good, solid mid-single-digits organic growth in our business.

I feel competition is continuing to increase. We talk about disruption. But there’s just an oversupply in the market on a global basis. So being able to do it better and cheaper and faster, those are no longer just fun, colloquial buzzwords — that’s the reality of where we [need to be]. It challenges us on talent, it challenges us on how to go to market. And I think that’s going to continue.

S+B: I also want to ask you about trust, particularly how it relates to data and data security. Can you just talk a little bit about your fears, and then how you deal with that? What the CEO’s role in it?
Boy, I hope the answer is you have to be more engaged. If not, I’m wasting a lot of my time. I would say going back five years, we were all trivializing cybersecurity. I think we were all trivializing the sophistication of the criminals. And I think all technology providers were somewhat behind where they needed to be. At FIS, we have brought a lot of focus to cybersecurity over the last five years. My view is that not only do CEOs need to establish a stronger tone from the top, but the board has to be heavily involved in this as well. We literally get daily dashboards on this very topic. There is no such thing as being too good.

S+B: What do those dashboards tell you?
They cover your known vulnerabilities, both external and internal; access management; all the agents you’re running on your desktops and servers; and where you are in that deployment cycle. They publish a risk-based view of those vulnerabilities and areas that we need to be concerned about and focused on.

S+B: And this is something you’ve developed internally?
All internally. I would say we’re now in that phase of moving from internally developed systems to third-party systems, because there’s some stuff out there that’s quite good now. But it’s an area where you just can’t ever let your guard down, and you have to continue to ramp up your investment. I also, frankly, see cybersecurity as not a competitive differentiator. I think we’ve got to collaborate more. Any major breach is bad for business, whether it’s yours or someone else’s. Going forward, we’re trying to push the envelope as much as we can to collaborate more.

A lot of people would like to get away with thinking, “I’m compliant, and therefore I’m fine.” That’s not a good way to think about it. We all have assets that are beyond end of life. We all have known vulnerabilities that we’re not getting to and are patching for various reasons. And it’s how you’re focusing on that and trying to address it that’s important.

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