SAN FRANCISCO -- Visa shares rose more than 30 percent in their stock market debut Thursday.
Investors are grabbing up a piece of the largest initial public offering in U.S. history.
Visa IPO Could Save Economy?JPMorgan Chase & Co., Visa's biggest customer and shareholder, is in line for the biggest payoff from Tuesday's IPO - about $1.25 billion, based on figures provided in Securities and Exchange Commission documents. More than $10 billion of the IPO proceeds are being used to buy back some of the shares owned by the banks that have helped build Visa during the past 50 years. The money is expected to help banks strengthen their balance sheets as they write off billions of dollars in loans that have soured amid the worst housing slump since the 1930s. The Visa windfall will supplement a series of Federal Reserve Bank measures that have pumped billions of dollars into the banking system. That's five times more than New York-based JPMorgan has agreed to pay in a proposed takeover of investment bank Bear Stearns Co., a major casualty of the credit crisis. Other big winners in Visa's IPO include: Bank of America Corp., expected to receive roughly $625 million; National City Corp., about $435 million; Citigroup Inc., about $300 million; and U.S. Bancorp and Wells Fargo & Co., both getting more than $270 million. All the banks will remain major Visa shareholders. The IPO also is expected to generate more than $500 million in fees for Visa's team of investment bankers, led by JP Morgan and Goldman Sachs & Co. Besides paying banks, Visa is depositing $3 billion in an escrow account to insulate its shareholders from lawsuits alleging the company profited by stifling competition. Those legal headaches are one of the chief reasons that Visa decided to go public and pose the biggest investment risk in the IPO, said Aite Group analyst Gwenn Bezard. With loan problems battering the banking industry, Visa executives sold the IPO by positioning their company as a safe haven - a message that apparently resonated with investors. "In times like this, you generally see a flight to quality," said Joel Greenberg, a New York attorney who has advised on other IPOs. Unlike lenders who have issued nearly 1.5 billion cards bearing its brand, Visa doesn't carry any consumer debt on its books. The company makes its money from processing fees, which have been steadily rising for years, including the past two U.S. recessions in 1991 and 2001. Since the latter recession, Visa also has been able to entice consumers to use its credit and debit cards more frequently to pay for staples like groceries, gas and even utility bills. Visa estimates about 42 percent of its transactions fall into this "nondiscretionary" category, up from 27 percent in 2000. Visa conceivably could benefit from tougher times if more cash-strapped consumers rely on their credit cards to make ends meet, Bezard said. "And even if people can't pay back the debt, Visa still makes money. It's a very attractive company." The IPO gives investors a chance to profit from the rise of electronic payments as more people eschew cash. The trend is expected to accelerate in the years ahead as an entire generation weaned online grow up to enter the job market and begin buying more merchandise and services on the Web, where electronic payments are standard. Visa already dwarfs its closest competitor, MasterCard Inc., whose stock has more than quintupled since that company went public less than two years ago. But analysts say Visa priced its IPO more aggressively than MasterCard, making it less likely that its stock will appreciate as dramatically in the months ahead. Visa processed 44 billion transactions totaling $3.2 trillion in 2006, according to the Nilson Report, an industry newsletter. MasterCard handled 23.4 billion transactions totaling $1.9 trillion in the same year. Hurt by legal expenses, Visa suffered an $861 million loss on revenue of $5.2 billion in its last fiscal year ended Sept. 30. Visa bounced back in its fiscal first quarter a $424 million profit, a 70 percent increase from the previous year. While pitching the IPO, Visa executives told investors to expect the company's earnings to rise by at least 20 percent during the next two years. To help achieve that goal, Visa plans to trim its annual expenses by about $300 million over the same period.