Catapulted by the biggest IPO in U.S. history, Visa shares soared 28 percent in their stock-market debut Wednesday as investors bet an...
SAN FRANCISCO — Catapulted by the biggest IPO in U.S. history, Visa shares soared 28 percent in their stock-market debut Wednesday as investors bet an accelerating shift to electronic payments will enrich the world’s largest processor of credit and debit cards.
After being priced above expectations at $44 per share in an initial public offering (IPO) that raised nearly $18 billion, Visa shares finished at $56.50 on the New York Stock Exchange Wednesday. The run-up gives the San Francisco-based company a market value of about $45 billion.
“This is an exciting and historic day for Visa,” said Chairman Joseph Saunders, who received a $10.2 million bonus last year for laying the IPO groundwork.
Investors think Visa is in a lucrative position as more people rely on its electronic network to make payments instead of using cash and checks. The company is expected to milk the phenomenon to become an even bigger cash cow than it already is.
Most Read Business Stories
- The penthouse atop Smith Tower is on the rental market for the first time
- Downtowns will be back, but Seattle has choices to make
- Boutique cruise line Windstar will move its Seattle headquarters to Miami
- Zillow’s price estimates are now cash offers in homebuying push
- FCC approves $50 monthly high-speed internet subsidy for low-income households
Visa generated $5.2 billion in annual revenue last year as it handled more than 44 billion transactions totaling more than $3.2 trillion. The volume puts Visa far ahead of its main rival MasterCard, whose own shares have more than quintupled from their May 2006 IPO price of $39. Mastercard finished Wednesday at $208.39.
Making Visa even more alluring to investors, the company is well-insulated from the credit problems that have scarred many of the lenders that issue the cards bearing its brand.
Unlike those lenders, Visa doesn’t carry any consumer debt on its books. It depends on transaction fees, which have been steadily rising for years, including the past two U.S. recessions in 1991 and 2001.
Since the last recession, Visa has enticed 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 enjoys one of the widest economic moats that a company can desire,” Morningstar analyst Michael Kon wrote in a Wednesday research note.
Reflecting management’s confidence, Visa anticipates annual earnings growth of at least 20 percent for at least the next two years. The company got off to a fast start in its fiscal first quarter ending in December with a $424 million profit, up 70 percent from the previous year.
Visa overcame turbulent market conditions to shatter the previous U.S. record IPO of $10.6 billion raised by AT&T Wireless eight years ago, when AT&T spun off its Redmond-based cellphone business as a tracking stock.
“To sell 400 million shares at a time like this is Herculean,” said David Menlow, president of IPOfinancial.com
Investment bankers could still exercise an option to buy another 40.6 million Visa shares during the next 30 days. If that happens, Visa’s IPO will end up raising $19.7 billion before expenses.
Visa has earmarked nearly $12 billion of the IPO proceeds to buy back shares from the banks that helped build up its network over the past 50 years. The biggest chunk, about $1.36 billion, will be paid to its largest customer and shareholder, JPMorgan Chase, according to an updated breakdown filed late Wednesday.
Other major banks cashing in on Visa’s IPO include: Bank of America, National City, Citigroup, U.S. Bancorp and Wells Fargo.
The windfall comes at a propitious time, given the banking industry’s wobbly condition as billions of losses pile up from the housing market’s worst downturn since the 1930s.
Another $3 billion from the IPO is being deposited into an escrow account to cover potential liabilities in lawsuits alleging Visa conspired to stifle competition and fix prices.
Those legal problems represent one of the biggest risks to owning Visa stock, although the company’s management maintains the escrow account and contingency measures should adequately protect investors. Visa paid more than $2 billion late last year to resolve a suit with American Express, but a similar case brought by Discover Financial Services is scheduled for a Sept. 9 trial in New York.
For now, Visa is planning to trim about $300 million in expenses during the next two years to boost its operating profit margin from 37 percent.
Menlow and other analysts don’t view Visa’s blockbuster IPO as a sign that jittery investors have suddenly become more interested in taking chances on companies going public for the first time.
“This is more like an oasis in the desert,” Menlow said.
The arid conditions have produced just 22 IPOs far this year, down from 47 at the same juncture in 2007.