Amex’s M&A Head on Its New Silicon Valley Outpost, Its Investing Parameters, and Who Makes the Final Call

Every big company faces obsolescence at some point. For its part, American Express isn’t going gently into that good night any time soon. Instead, the credit card processing giant is determined to remake itself into a nimble software and services company — one that both facilitates the kinds of digital transactions that are overtaking other forms of payment, and plays a starring role in their adoption.

One of the first steps toward that end came last year, when the company brought aboard Dan Schulman. At the time, Schulman was president of Sprint Nextel’s prepaid group and, before that, he was chief executive of Virgin Mobile. American Express actually created a title just for him, as “group president of enterprise growth,” a unit that’s not only tasked with reimagining the company’s core business but for all of its M&A and venture activity, too.

At Schulman’s direction, the company is also right now setting up a Silicon Valley office in the heart of Palo Alto. In charge is Harshul Sanghi, formerly the managing director of North American venture activities for Motorola Mobility, which Google announced plans to acquire back in August. But Schulman says the office should eventually have 25 to 30 people, including financial analysts and software engineers, along with an investing team. (Wink, wink, it’s hiring right now. Its “official” opening takes place in early December.)

To find out more about that new outpost and American Express’s ambitious other plans around mobile and online payments, I talked briefly with Schulman yesterday afternoon. He gave me an overview of where his unit is hunting for deals, how much it’s willing to spend to acquire a startup, and who ultimately approves deals. Our conversation has been edited for length.

You head up American Express’s so-called enterprise growth unit. What do you oversee, exactly?

Enterprise growth is really trying to do a couple of things for American Express. The first is to think about the future of the payments industry, and how it’s transforming from plastic into digital and into software, and how we get ready for that change. Specifically then, within my group, I’ve got all of our digital efforts, including our new digital commerce platform, Serve; our online and mobile efforts; and our move into developing markets, like China and India, where it’s likely that digital payments will be the dominant form of payments on a go-forward basis as opposed to cash. As part of my job, to get us ready for the future and open us up to new segments, I [oversee] mergers and acquisitions [and venture deals].

American Express suddenly seems fairly active as an investor and acquirer. Does it only invest in companies it might ultimately buy, or does it occasionally fund startups to get insights into a particular business?

There are capabilities that we need and can either acquire or strategically [support through an investment]. If there’s [an ideal] partner, we might partner for distribution, or acquire them, or [do a] joint venture with that partner. Or we can create partnerships, as we’ve done with Verizon [which has begun integrating Serve into its phones and tablets] and Ticketmaster [whose event tickets can be purchased using American Express membership reward points] and AOL [whose Patch customers can use Serve to buy and redeem local deals] that aren’t strategic investments but integrated relationships in which we combine our assets and strengths and those of our partners.

Tell me about your strategic venture deals. You led a financing round for the startup Clickable last week. Why?

We’ve done a number of [related] deals this year, including [ad management platform] Clickable, [mobile payments provider] Payfone, and also [e-commerce platform company] Rearden Commerce. All three have important capability sets that in some way enabled us to ensure that we could bring capabilities to the marketplace faster than we could on our own. We didn’t feel the need to own those companies but to strategically invest, and in some cases, have a board seat.

Other capabilities, we feel it would behoove us to acquire, like [the virtual currencies payment platform] Sometrics [acquired by Amex last month for $30 million]. Through their platform, they move $3.3 trillion units of virtual currency, and as we look into future, we believe virtual currency will be an increasingly important part of payments landscape. The [deal] also provided us with great software engineers and analytic capabilities that we thought could move us into interesting areas around loyalty, so we felt like it made sense to fully integrate them into the Serve platform.

What about your new Silicon Valley office? Harshul Sanghi is leading it; who else is there and how much are you going to be sinking into deals? Do you have minimum and maximum amounts in mind?

We’ll have folks there including financial analysts, software engineers, and technologists who can evaluate the various opportunities that we’re seeing. It’s an office with room to expand to 30 people.

As for commitments: as you look into the future of payments and digital commerce, it’s a highly complex space. I think success requires a willingness to recognize that we both need to create new skill sets in American Express and to look outside, both at smaller tuck-in acquisitions as well as potentially larger acquisitions.

If you look at last couple of years, we [spent] $300 million to acquire Revolution Money, which became the foundation for the Serve platform. More recently, we spent $30 million for Sometric. We’re also willing to do more seed-type investments. It just depends on the company. There are no hard and fast rules here.

And the rest of your team is in New York? Is that where final decisions are made? How does the chain of command work?

Our primary M&A function is headquartered in New York, where I’m also located. Our Silicon Valley office is our second post, but we’re looking at investments around the world and sending teams overseas on a regular basis. We believe that as the world goes digital, there’s a tremendous opportunity for us to enter into markets that were predominately cash based and that were very hard for us to penetrate [historically].

[As for chain of command], each business unit has its strategies and tactics, then they use this common M&A function that reports to me. We look at all the different potential opportunities, from divestitures to selling businesses to acquiring businesses.

Each business unit has its strategies and tactics, they then utilize this common M&A function that reports to me. We look at all the different potential opportunities, from divestments to selling businesses to acquiring businesses. For example, we did a relatively large [$585 million] acquisition of [marketing services company] Loyalty Partner, about a year ago. It basically strengthened our loyalty platforms and helped to expand us internationally by acquiring quite a number of customers, and that was driven by our M&A team, working hand in hand with our core business unit, to ensure it made sense for them and that they’d run it once we made the acquisition. So we try to have a set common function that has expertise that can look at a deal, to negotiate a deal, and to set up integration as we set up that deal. Deals will go to our board for approval as well.

There’s quite a bit of process around any acquisition or investment that we might make, though we’ve staffed our M&A function to do much more deal flow, and we make informed, but relatively quick, decisions.