Clarified on 2/27/08: An earlier version of this story implied a settlement had been reached regarding Visa's antitrust issues. Litigation is ongoing.
Homer Simpson once lovingly described alcohol as "the cause of—and solution to—all of life's problems." The windfall expected from Visa's plan for a record-breaking initial public offering might be viewed in much the same way.
The credit card giant's debut is expected to generate $18.8 billion. Ironically, the much needed shot in the arm for write-down-saddled banks, the stagnant IPO market—and even, as the San Francisco Chronicle put it, the whole economy— that this will provide comes care of one of the biggest conduits Americans use to run up the billions of dollars in debt now experiencing rising defaults and threatening consumer spending.
That won't stop investors from clamoring for Visa shares, however. The deal is expected to be one of the few successful offerings this year in a market that remains basically frozen, as underwriters and companies wait out credit problems, bank woes, and economic uncertainty before going public.
Analysts see pent-up demand for the shares as regular investors, suffering from with what's been dubbed "MasterCard envy," eagerly await the chance to get in on one of the few financial-sector stories that aren't suffering from credit problems. "This is a unique event," says David Menlow, president of ipofinancial.com. "People have been salivating for two years since MasterCard's [IPO]."
That deal by Visa's smaller rival raised more than $2.4 billion in May 2006 and scored one of the best performances on Wall Street in the following months. Its shares, which went public at $39, now trade at $195.
If Visa hits even the low range of its target prices, the deal will blow past the $10.6 billion debut of AT&T Wireless in 2000.
Part of the allure of both Visa and MasterCard is their long-term growth prospects, as shoppers continue the long shift from cash to plastic. Between 2003 and 2006, debit card use surged 62 percent, according to Federal Reserve data. Visa, which holds about half of that market, estimates its volume could gain 11 percent a year through 2012 on strong growth in Asia and the Middle East.
Also, the two don't face credit risk because they don't extend credit to cardholders, like rivals American Express or Discover Financial Services, instead drawing revenue from transaction processing for the banks (which extend the credit).
Cash raised in the offering should quench the thirst among strapped institutions ailing in the wake of the mortgage bust. As Floyd Norris of the New York Times reports, the big investment banks are among the winners in the deal. They'll be distancing themselves from some antitrust trouble at Visa, while raking in some much needed cash from fees and their existing ownership of Visa. JPMorgan and Goldman Sachs were lead underwriters and will share in an estimated $350 million in deal fees with several other big banks, according to the Wall Street Journal. Cash will also flow to hundreds of smaller member banks, which made up the core of Visa's business.
For worried bankers and investors hunting for safe investments, it might be time to raise a glass.