Extra Credit for Visa's IPO

A strong response to the credit-card titan's public offering—the biggest ever in the U.S.—could thaw out the freeze in new offerings

by Ben Steverman

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Financial markets face a key test on Mar. 20, when Visa Inc. plans to float the largest initial public offering in U.S. history. The Visa debut could bring in up to $18.8 billion, a flood of investor dollars in the midst of what is otherwise one of the driest IPO markets in recent years.

The deal's underwriters, which include Goldman Sachs (GS) and JPMorgan (JPM), will try to attract investors by pointing to Visa's solid spot atop a fast-growing industry. As customers around the world shift from cash and checks to credit and debit cards, the benefit accrues to Visa and smaller rivals like MasterCard (MA), American Express (AXP), and Discover Financial (DFS). Visa's revenues grew 33% last year, to $5.2 billion, and the Nilson Report estimates the number of card transactions globally should grow 11% each year through 2012.

As fears of a U.S. recession rise, Visa can market its stock as a haven. Not only is much of its growth expected to happen overseas—your Visa card can be used in 170 countries—but it's a "relatively recession-proof business," says Gwenn Bézard, research director with the Aite Group.

Sensitive to Consumer Spending

Visa doesn't issue the pieces of plastic that bear its name to consumers or mail out their bills. That is left to banks that issue the cards. Rather, Visa runs the credit-card network that connects the banks and merchants. It makes money on each transaction made over its network, so it's somewhat sensitive to the ebb and flow of consumer spending. But it doesn't assume any of the risk that cardholders won't pay their bills, which is a rising risk in a recession.

Putting together an $18.8 billion IPO is a huge undertaking, especially at a time of market turmoil and economic uncertainty. The deal has 19 underwriters, which is more than Scott Sweet of IPO Boutique says he has seen in his 35 years watching IPOs. The investment banks "desperately want this deal to go well," Sweet says, because it could generate $500 million in fees. With the financial sector walloped by the subprime crisis, "they need this revenue," he says.

Some aspects of the Visa deal could give investors pause. The card network and brand name are well-established, but the company is the result of a reorganization completed in late 2007. The management team is brand new.

$3 Billion Set Aside for Lawsuits

But the biggest risk to Visa may be a series of lawsuits and government regulations, some a decade old and some still in the works, aimed at introducing more competition to the industry. Regulators, rivals, merchants, and banks have claimed Visa unfairly dominates the credit-card network. As part of the IPO, $3 billion will be set aside to pay out settlements, but Visa surely will face more costly court fights and a more cutthroat marketplace. "There's a tremendous potential here that the profitability of Visa and MasterCard could be seriously damaged by regulation," says Tom Mangan, portfolio manager of the James Advantage funds.

If, despite the risks and the tough economy, the Visa IPO is a success, it will represent a rare sign of health for the financial markets. Sweet says the Visa deal could bring an "avalanche of interest" in the IPO market, which has been in the doldrums since the New Year. "That they can assemble a deal of that size, in this market environment, is both intriguing and exciting," he says.