Visa's IPO Victory

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

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by Ben Steverman

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.