Extra Credit for Visa's IPO

(page 2 of 2)

Goldman and JPMorgan are hoping to repeat the success of MasterCard's 2006 IPO—shares more than tripled in the first year. But they want to avoid the fate of the Blackstone Group's (BX) initial offering. Shares of the private-equity firm have plunged 58% since its June, 2007, debut. If Visa goes the way of Blackstone, the anemic IPO market could get even weaker. Both the number and size of global and U.S. IPOs so far in 2008 are at half the level they were at this point in 2007, according to Dealogic.

Investors Are Gun-Shy

IPOs by large, well-established companies like Visa are rare. A more typical IPO is a small, young company that needs capital to keep growing. And it has been harder for those firms to get IPO capital. Last year, software maker VMware (VMW) went public and jumped 73% in its first two months. Times have changed: Biotech company Bioheart (BHRT) has fallen 5.7% since its February IPO, despite what Sweet calls a "fire-sale price."

Investors, worried about the economy and their shrinking portfolios, simply aren't willing to take a chance on new, speculative stocks. By going public now, Visa is taking a chance. Shares are expected to be priced at $37 to $42, for a total take of $15 billion to $18.8 billion. The final price will be set on Mar. 19, and the stock will start trading the following day. "The price is not what they could have gotten in a stronger market," says Nick Einhorn, an analyst at Renaissance Capital.

So why do an IPO now? For one thing, the IPO is part of a long process of reorganizing the company, combining various loosely affiliated Visa companies around the world. That's a long two-year process that's hard to put on pause, Einhorn says. Plus, Visa's owners are the banks who issue Visa credit cards. With financial firms posting huge losses, these banks definitely need the money the IPO is expected to generate.

Spending Big on Incentives for Merchants

Also, Mangan says, the IPO gives Visa's owners a chance to unload some of the company's liability risk. Visa is promising that its former bank owners, not new investors, will assume much of the risk from lawsuits. But it will be a while before investors see how the regulatory and liability issues are worked out.

As with any new company, it will take some time for Visa to prove itself. The market will watch carefully to see how Visa is handling competition and global growth. The Aite Group's Bézard notes that Visa is spending big on incentives for merchants and banks that issue its cards, and he wonders how that spending will affect profits in future quarters. Also, Visa faces a lot of local competition around the world; China, for example, has set up its own credit-card network. "There are lots of opportunities, but it's not going to be a walk in the park," Bézard says.

Even MasterCard's IPO didn't do amazingly well right away. It took a few earnings reports before investors were convinced of the company's potential, Einhorn says.

Visa's IPO will be an important test of strength for financial markets that have looked pretty wimpy lately. But Visa's real challenge will be living up to investor expectations in the years to come.

Check out the BusinessWeek.com slide show to see the 10 biggest U.S. IPOs.

Steverman is a reporter for BusinessWeek's Investing channel.