Visa’s IPO Could Change Everything
Visa Inc.’s long-awaited initial public offering could be Wall Street’s “big show” of the year, but should individual investors try to get in line and buy a ticket? Market watchers have been answering with a resounding, “Maybe.”
San Francisco-based Visa, as the world’s largest processor of credit and debit cards, is a dominating player in one of the fastest-growing businesses on the planet. The company is hoping its vision of all-electronic payment processes will take the place of payments made with cash or checks.
The Visa IPO, which should be in gear by the end of March, promises to be the largest one in U.S. history by a very wide margin. The offering hopes to raise more than $18 billion on the sale of up to 446 million shares, and everyone who is willing to write a check will be welcome to buy. This applies to a hedge fund manager in Connecticut as well as to a convenience store owner in Fresno, California.
Financial analysts report that Visa has a “strong business,” seeing as how it is the leading electronic payment processor in the world, handling more than $3.2 trillion in electronic payments and related transactions in 2006. The company continues to hold a wide lead over second-place MasterCard, with over $1.9 trillion in processing. Third place belongs to American Express with transactions of some $562 billion.
As plastic continues to displace cash and checks for even the most routine transactions, the credit card industry has seen electronic payments grow exponentially. Consumers now use credit and debit cards to pay for everything from parking tickets to income taxes. In fiscal year 2007 Visa’s revenue grew a colossal 33 percent, to $5.2 billion.
Kathleen Smith is a principal of a Connecticut firm that tracks the IPO market, Renaissance Capital, and says that the Visa offering is “a very interesting IPO for investors.” Exactly how interested investors will be, of course, depends on share pricing. Rival MasterCard, which went public two years ago with a share price pegged at about 15 times its earnings, has seen its stock roughly quintuple in value. Considering its profit gains in the intervening years, MasterCard’s shares now trade at around 22 times earnings.
The Visa IPO, however, won’t be as cheap as MasterCard’s was and buyers are unlikely to enjoy the huge gains in the first few years that MasterCard investors did. In addition, if Visa’s IPO price rises above a certain, expected range, the deal would become inordinately expensive as well as riskier.
As much as anything can be predicted, it would seem that circumstances should keep Visa’s offering price from spiraling out of control, according to analysts. More than a few professional investors still worry that Visa’s stock price could be depressed in the future, as banks that will are holding almost half the company’s shares end up selling their positions.
Finally, the economy is in a prolonged slump, and stock prices in general have been falling, particularly those of firms that have recently gone public. Renaissance Capital’s IPO index is off a good 15 percent so far in 2008, compared with just a dip of some 6 percent in Standard & Poor’s 500 index.
Assessing the big picture, along with more than a few caveats, Renaissance Capital’s Smith says, “When a company is willing to do an IPO in a weak market, they need to price the IPO to make investors interested.” How
Visa handles the IPO pricing, as well as its other important management and financial challenges, has the potential of changing just about everything in the credit card industry. This is a situation that bears watching, by everyone in every business sector. Stay tuned.
