Visa's IPO - Credit or Debit?
As Visa’s expected public offering approaches, will the company’s IPO draw the attention that was anticipated? Visa’s initial public offering could potentially be the biggest IPO in the history of the US. Visa plans to offer 406 million Class A shares with a price target between $37 and $42 / share which could value the IPO at approximately $16 billion. The offer is expected to take place next week on March 19th under the ticker symbol V, and could surpass AT&T Wireless’ $10.6B IPO in 2000, and Kraft’s $8.7B IPO in 2001.
Visa’s IPO comes at a time of economic uncertainty. The Renaissance IPO Index which reflects IPO’s activity and their performance for two-years from their first day of trading is down 21% year-to-date. So will the IPO be successful?
Visa’s business model relies on its strong brand recognition and its reputation for the world’s largest payment network, handling $1.8 trillion in total volume of goods, services, and cash access transactions in the United States. According to its SEC S-1 filing, 99% of Visa’s revenue comes from card service and processing fees making it less sensitive to the defaults in payments that rise during economic downturns. It largely acts as a liaison between the banks issuing the credit and merchants without taking on risk itself.
Federal Reserve data also shows that consumer revolving credit continued to grow even during the last recession, albeit at a slower rate. Visa's S-1 shows operating revenues for the 9 month period ending June 2007 were $2.6 billion. Year over year revenues for the same period grew by 18%. According to Visa, card purchases in the United States have increased at an annual compound growth rate of 12% from 2000 to 2006 as this trend is expected to continue at an annual compound growth rate of 8% through 2012.
Governments, corporations, and merchants continue to incorporate electronic payment systems in order to increase efficiency, security, and control. Jupiter Research predicts that online retail spending, as a portion of total retail sales will increase to over 50% by 2010, which could potentially lead to greater profits for Visa through more transaction fees.
Visa is the market leader in card transactions, with close to double its next closest competitor, MasterCard . MasterCard had a successful IPO in 2006, valuing the company at $2.4 billion. Since the IPO, MA shares have risen over 300% in nearly two years and it now has a Market Cap of $25 billion.
The top 5 issuers of general credit cards ranked by $ Billion Outstanding as of Dec. 31, 2007 include (Nilson Report):
- Bank of America with $164B
- JP Morgan Chase with $150B
- Citigroup with $111B
- American Express with $97B
- Capital One with $59B