For One Day, Cash Is King at Visa As Its IPO Soars

Visa Inc.'s current slogan is “Life Takes Visa,” but now it's “Wall Street Takes Visa.” After raising a record $17.3 billion late Tuesday by pricing its initial public offering of stock at $44 per share, above its target range of $37 to $42 per share, Visa's stock opened on the New York Stock Exchange Wednesday morning at $59.50. In late-morning trading Visa's price was $59.95 per share, 36% above the IPO price. Observers call the successful IPO a respite from the current market turmoil originating with subprime mortgages and an endorsement of the bank card networks' prospects, especially in light of MasterCard Inc.'s IPO nearly two years ago. Since then, MasterCard's stock has risen by more than 400%. Revenues generated by cardholder transaction volume and fees from member financial institutions drive the card networks' revenues. “Growth is a secular trend, they [Visa] don't have to do a lot to generate growth,” says Michael Kon, an equity analyst with Chicago-based Morningstar Inc., noting the worldwide shift in payments from cash and checks to cards. Consultant and former MasterCard executive Steve Mott of Stamford, Conn.-based BetterBuyDesign says the strong IPO price and opening run-up was the result of Visa holding expectations in check before the sale, which translated into a financial reward for Visa's long-time shareholders and underwriters. “The only negative is consumers may not be spending as they did previously; volume might be slowing down a little bit” in the soft economic environment, he says. Still, consumers will continue to spend on cards even if the average tickets aren't as high for a while, he notes. David Lott, senior vice president at Alpharetta, Ga.-based consultancy Speer & Associates Inc., agrees that “Visa is a quality organization,” but doubts there will be a repeat of MasterCard's 400% run-up now that the market has some experience with card networks. Visa, which is not commenting yet, intends to use $3 billion in IPO proceeds to fund an escrow account for expenses arising from legal challenges to its interchange structure and fees around the world. Visa also plans to use $10 billion to redeem stock held by financial institutions who until yesterday where its exclusive owners (Digital Transactions News, Feb. 28). A number of big banks stand to reap rewards in the hundreds of millions of dollars, and JPMorgan Chase & Co. could gain more than $1 billion. Even after those expenses and paying underwriting and related IPO costs of about $500 million, Visa still will have several billion new dollars in its pocket. Kon notes that Visa could go on an acquisition drive, though that could be costly, especially in overseas markets where the big growth potential lies. In many countries, banks own local payment networks that might be attractive to Visa but which the owners won't sell “unless Visa overpays,” he says. Thus, Kon expects Visa will focus for now on expense reduction. If it does go shopping, Kon expects Visa to first target e-commerce software companies, business-to-business payment-services providers, or other small companies that could help Visa round out its product platform. If market conditions remain soft, however, some well-known companies could come up for sale that both Visa and MasterCard might find attractive, according to Mott. “Then you've got a real horse race,” he says. Visa sold 406 million shares in the IPO and its underwriters could sell 40.6 million more in the next month, depending on market conditions. Meanwhile, Discover Financial Services LLC today reported that charge volume in its first fiscal 2008 quarter grew 5% over a year ago even though a worsening economic environment caused loan losses and delinquencies to rise.