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Visa (V)
Visa Begins Trading After Record-High IPO
A new company begins trading on the New York Stock Exchange today - Visa, popular credit card company. The company conducted its initial public offering last night, which rose a stunning $18 billion, considerably above the previous record-high IPO (AT&T (T: Charts, News, Offers) in 2000, with a nearly $11 billion IPO). Many people are expecting the stock to do very well today, but others are wondering how well a financial services stock can do in a time when so many of the economic worries are based around credit. Could the timing be any worse? Or might this environment actually be conducive to Visa's success?
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Visa is already making headlines, with the news of its record-breaking IPO yesterday. Shares were expected to be offered at a price between $37-$42, but instead were offered at the higher price of $44. And that price didn't scare anyone away; over 400 million shares were purchased yesterday, bringing in nearly $18 billion dollars. In addition, the underwriters have the option of purchasing approximately 40 million more shares, which would bring the total up close to $20 billion. Many analysts predict that when trading begins, shares will rise above $50, if not higher.
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Although this sounds like good news, Visa isn't making as much money as it seems. First, Visa is using a large amount of the money from the IPO to buy back shares from its major shareholders, such as JPMorgan Chase (JPM: Charts, News, Offers), Bank of America (BAC: Charts, News, Offers), and Citigroup (C: Charts, News, Offers). A total slightly above $10 billion, more than half of the money raised from the IPO, will go to these companies and other major shareholders. An additional $3 billion is being set aside in a special escrow account, which will be used for legal proceedings which will inevitably arise; by putting the money aside now, Visa is hoping protect shareholders from having to deal with the legal fees in the future.
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Is Visa ready to become a public company? MasterCard (MA: Charts, News, Offers), its biggest competitor, went public in 2006, and has done very well. MasterCard went public at $39 a share, and in less than two years rose to a high over $225 per share. Their stock has been declining slightly in recent months, likely due to the credit concerns, and has fallen to $210 per share. Maybe Visa could do as well as MasterCard has...Visa is about twice the size of MasterCard, in terms of number of transactions, but Visa has also struggled to be profitable over the last few quarters.
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Interestingly, Visa and MasterCard do not carry consumer debt, so they are not as affected by the credit crisis as some might believe. The bulk of Visa's money is made through processing fees, so Visa benefits if they can get their consumers to use their cards for as many purchases as possible. In fact, one can imagine that some consumers will be more likely to use credit if they are struggling with their finances or aren't otherwise able to meet certain payments; if more customers turn to credit in this time, Visa could actually benefit from this frustrating economic situation.
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Despite the concerns, many people remain optimistic. It is expected that Visa's good IPO performance might help propel the markets upwards this morning. It might be enough for investors to see that a company was able to conduct a successful, high-value IPO, even when times are hard. But because there are simply so many unknowns about our current economic situation, it's hard to tell where the markets will go in the future, especially the in the financial sector where we have already seen so much volatility recently. Maybe Visa is a company that will be able to succeed even when so many others fail, or maybe Visa will be pulled downward as the markets continue to trend in that direction. It will be interesting to see how they perform today, but more important to see how they perform in the future.
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