The company's initial offering was a hit and a rare sign of strength in a weakened stock market. But the post-Visa IPO landscape looks bleak
By conventional measures, Visa (V) chose a terrible time for an initial public offering.
Just days after the collapse of a major investment bank, with credit market turmoil at its worst and the recent IPO market drier than a desert, it would be easy to understand if investors showed no appetite for shares of a new financial firm.
Instead, investors fought for a chance to bite off a piece of the Visa IPO.
Out of the Gate with a Bang
Visa was expected to debut at a price of $37 to $42 per share, but there was enough initial interest to price the deal at $44 on Mar. 18. On Mar. 19, Visa, under the stock ticker "V," opened on the New York Stock Exchange at 59.50 per share, and finished the session 29% above the offering price, at 56.86. The price action in Visa was in stark contrast to the rest of the market: Major U.S. indexes each declined more than 2% on Mar. 19 amid continued worries about the banking sector.
Visa's IPO could raise as much as $19.6 billion, giving a big payday to its former bank owners. Also, the 41 Wall Street brokers that underwrote the deal should net fees of more than $500 million.
Those are welcome sources of revenue at a dark time for the financial sector. That's one reason Visa chose this unpredictable time to go public. Also, the IPO is the culmination of a complicated, two-year long reorganization of Visa, a process that gave the firm little flexibility to postpone its offering.
Confidence in the Brand
Scott Sweet of IPO Boutique says the IPO might have faced trouble due to the recent collapse of Bear Stearns (BSC). But an interest rate cut by the Federal Reserve and solid earnings from Lehman Brothers (LEH) and Goldman Sachs (GS) on Mar. 18 "gave a lot of people the feeling that the worst may be over for the time being." (Sweet spoke before the late-session stock market decline on Mar. 19.)
The timing of Visa's IPO might be irrelevant. Investors might have been waiting for the chance to get in on an impressive company from the very beginning. "Maybe people view [Visa] as a safer place to put their money," says Nick Einhorn, a research analyst at Renaissance Capital, which tracks the IPO market. "Management did a good job of selling [Visa] as a good company even in an economic downturn."
Visa runs the network over which credit-card transactions run, but it doesn't issue the cards to consumers or mail out their bills. Banks, not Visa, take on the risk that recession-battered consumers won't pay their credit-card debt.
Plus, Visa benefits from long-term trends. Visa and rivals like MasterCard (MA)—which had its own successful IPO in 2006—profit from the global shift from cash and checks toward credit and debit cards.
Prospects for Growth
The more transactions it performs, the more money Visa makes. And according to the Nilson Report, an industry publication, the number of card transactions globally is expected to grow 11% each year through 2012.
Morningstar (MORN) analyst Michael Kon estimates Visa's revenue could increase an average of 12% per year for the next eight years. Visa credit cards have been around for decades, but it is a new company in the sense that it links separate bank-owned Visa associations around the world. That reorganization gives Visa the opportunity to cut costs deeply, Kon said.
The danger for Visa investors are mostly legal and regulatory.
Looming Regulatory Issues?
By far the largest credit-card network in the world, Visa for years has faced critics who say it unfairly dominates the industry, pushing out competitors and squeezing merchants for higher fees. Some lawsuits against Visa already have been successful and others are pending, so the Visa IPO sets aside $3 billion for settlement payouts.
Even if this lawsuit fund is sufficient, regulators could put pressure on profits or cause problems for Visa's worldwide expansion plans by forcing more competition between card networks and by making it tough for Visa to expand in new markets.
Clearly, investors are betting Visa can conquer these issues and get a big share of the market in places where credit-card use is booming, like Latin America, the Middle East, and Asia. Visa has "a great brand name and a solid track record," Einhorn says. It is a market leader in its industry, with "strong financials" and fast growth for such a big company. "All the trends are working for them," he added.
MasterCard, which has seen its stock price more than quadruple since its IPO in 2006, traded slightly lower Mar. 19, but did much better than the broader market.
That's a good sign for Visa, Sweet says, because it indicates investors aren't simply shifting dollars from one credit-card network to another. "They're buying Visa solely on its potential, which I believe is very high," Sweet says.
IPO Market Still Bleak
It could take months or years, including some closely watched quarterly earnings reports, before Visa and its new management team prove themselves to Wall Street. Sometimes big IPOs do well in their first trading sessions only to stumble later. One example is the last large IPO, by private equity firm Blackstone (BX). Blackstone shares have fallen 58% since their June, 2007 debut.
IPOs of companies as large and well-established as Visa are rare. That's why Visa's success might not revive this year's very tough IPO market. Renaissance Capital's index of recent IPOs is down 23% so far this year. Small, upstart firms looking for IPO capital are having a tough time.
In fact, on Mar. 19, while Visa jumped nearly 30%, a more typical IPO candidate—small health-care firm CardioNet (BEAT)—was making its debut. CardioNet priced its IPO at $18, below the initial range of $20 to $22 per share, but on Mar. 19, the stock closed at 17.70, down 1.67%.
No matter how many billions of dollars Visa raises, it clearly will take more than one successful IPO to restore investors' appetites for speculating on new companies.