Visa IPO

Visa's IPO could be one of the biggest IPOs in history reaping $18.8 Billion. At the midpoint of its proposed price range of $37 to $42 a share, Visa's offering of 406 million Class A shares would raise $16 billion. Visa said it might sell an additional 40.6 million shares to meet demand, which could boost the proceeds to almost $18.8 billion at the top end.

Although Visa's IPO will be the biggest IPO in history, Visa will see very little of the proceeds for its operations. According to its registration statement with the SEC the use of the proceeds will be as follows:

1. $3 Billion to go to an litigation escrow
2. $10.2 Billion to pay out existing shareholders
   
3. $2.346 Billion to be used to redeem other securities from shareholders later in 2008
   
4. The balance of $454 Million will be used for general corporate purposes.
   

There are big differences between Visa and MasterCard's IPOs. MasterCard came with no litigation risk associated with its operation not like Visa which have a huge litigation risk hanging over its head. A large chunk of the IPO proceeds will go for litigation reserve escrow; money that will not be used for operations. The other difference is the net cash inflow to Visa operations from the IPO will be much smaller that MasterCard's. MasterCard took in $650 Million or 26% of its IPO, while Visa is taking in only a mere 2.8%, which will not contribute much to expand its operations.

Still Visa's business is very intriguing as it gives owners a sustainable competitive advantage that is worth the risk. I am still reading their prospectus to understand their exposure and risk, it is not very east to digest.

On another note, BofA along with JP Morgan are the big beneficiary from the IPO from three sources:

1. As shareholders there are poised to make a windfall capital gains on their ownership stake, which will shore up their capital base.
   
2. The two banks are the two lead underwriters of the IPO; their fees and options will provide for nice gain in 2008.
3. With Visa off their books they can limit their exposure for further litigation risk that is plaguing Visa; it will become Visa's public shareholders problem.

Visa IPO

Visa is set to become a public company in 2008. It is expected to be one of the biggest IPOs in recent years. Although I do not like IPOs or investing in them, Visa offers a strong business that is worth the look.

You can find Visa prospectus here.

Most credit card companies, the big three anyways: Visa, AMEX and Master Card, are great businesses to own. They are what some investors dub them "toll bridges"; you have to pay every time you use them and in this case the merchant as well as the user pay.

Credit card companies have an incredible competitive advantage to new comers, if any dares to compete, look at the financial shape of Discover cards. The industry is almost impenetrable. Visa is one of the strongest franchises in credit card processing industry. It has one of the largest networks for card processing, a valuable brand name, and a large installed base of retailers and merchants accepting its cards. Visa is the largest credit card company of the three. It processed more than 44 billion transactions last year worth more than $3 trillion.

The company, no doubt, have the all the ingredients to be a value idea but at what price. Certainly people will trip over themselves to buy Visa sending its shares into the stratosphere. I think it is prudent to be patient with this one and look for an opportunity , as no doubt there will be some. Visa is locked in some litigations that can offer such an opportunity depending on its outcome. Another opportunity is the slowing economy and a possible rescission, which can send credit card defaults higher, which in turn will reduce Visa's earnings.