VISA IPO to Raise Cash and Transfer Litigation Risk

Marketplace is reporting Visa's IPO not feeling the crunch.

Despite the credit crunch, credit card giant Visa filed the largest initial public offering in history.

JILL BARSHAY: This IPO will change the shape of Visa. Right now Visa is owned by thousands of banks collectively. Marc Sacher specializes in credit cards at Aurriema Consulting Group. He says after the IPO, Visa will be mostly owned by investors who buy shares.

MARC SACHER: Previously, their directive was not really to make a profit, but rather to serve the interest of their members. Now, going forward they're going to be a for-profit company.

Sacher says the credit crunch isn't hurting Visa. It's the member banks who have to worry if you pay your bill or not. Visa's money come from the fees it gets every time you buy something with the card.

RICH MELVILLE: The banks are then distanced from litigation risk. If Visa loses the lawsuit from the retailers, the banks don't have to pay out of their own money. It's Visa's headache.

Some of the $19 billion will go to pay off the retailers. Another big chunk will help shore up the member banks' balance sheets.

Credit Card Transaction Fee Lawsuit

The Travel Guide For Your Finances has details on the Credit Card Foreign Transaction Fee Lawsuit.

The lawsuit is about the price cardholders of Visa, MasterCard, or Diners Club branded payment cards were charged to make transactions in a foreign currency, or with a foreign merchant, between February 1, 1996 and November 8, 2006. Plaintiffs challenge how the prices of credit and debit/ATM card foreign transactions were set and disclosed, including claims that Visa, MasterCard, their member banks, and Diners Club conspired to set and conceal fees, typically of 1-3% of foreign transactions, and that Visa and MasterCard inflated their base exchange rates before applying these fees.

The Defendants include Visa, MasterCard, Diners Club, Bank of America, Bank One/First USA, Chase, Citibank, MBNA, HSBC/Household, and Washington Mutual/Providian. They deny the Plaintiffs’ claims and say they have done nothing wrong, improper, or unlawful.

Who's Eligible?

Anyone who traveled abroad between February 1, 1996 and November 8, 2006 is eligible for cash back. We received forms several weeks ago. If you traveled abroad and have not received a form, click on the above link to submit a form online. Don't expect to get rich. For some, it may not be worth the time. We filled out the forms as a matter of principle more than anything else. I do not remember what we stand to get. I think it was $100.

Asset Sale To Raise Capital

The New York Times is writing Visa: Bailing Out The Banks.

Visa plans to go public this spring, and the prospectus filed today indicates that it will get $15.6 billion (after deducting about $481 million in underwriting fees) from the offering if it is sold at $39.50 a share, the mid-point of its offering range.

Of that money, how much do you think will stay in Visa to help the company grow?

In round numbers, zero.

This offering is evidently intended to serve two purposes. First, to bail out the banks that now own Visa from the financial responsibility of antitrust violations involved in Visa’s effort to keep its member banks from offering American Express or Discover cards. The first $3 billion raised goes into an escrow account to pay damages.

The second purpose is to get cash to banks that may need additional capital, which is to say a lot of banks. Essentially all the remaining cash from the offering will end up with the banks, from repurchasing stock from them. The banks can use the extra capital.

Whatever else this prospectus does, it lays out one of the most convoluted capital structures you will ever see. It has Class A shares — the ones the public is being asked to buy — Class B shares, which go to banks, and no fewer than four different kinds of Class C shares, which also go to banks.

The public will end up with just over half the ownership of the company, after bailing out the banks, and the banks will own nearly all of the rest.

The lead underwriters for the offering are JP Morgan Chase and Goldman Sachs. JP Morgan may have set the modern record for conflicts of interest by a lead underwriter. It is:

1. The largest shareholder in Visa.
2. The company’s largest customer, getting breaks of pricing not available to most other customers.
3. A member of the bank syndicate that agreed to lend $3 billion to Visa.
4. Slated to get $1.1 billion from the offering, through redeeming shares.

Here are the other estimated payouts to big banks from redeeming shares, assuming the $39.50 offering price:

Bank of America (Charlotte, N.C.) $545 million
National City (Cleveland) $380 million
Citigroup (New York) $261 million
U.S. Bancorp (Minneapolis) $241 million
Wells Fargo (san Francisco) $238 million

There is litigation from consumers over fraudulent fees as well as antitrust lawsuits against the banks who own Visa. Although the banks admit no wrong doing, their actions may be speaking louder than words. In addition, Citigroup and WaMu desperately needs to raise capital. This is one way to do it, and arguably the real driving force behind the IPO. Otherwise, this is clearly not the best time to be doing an IPO.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List