A closer look at Visa’s initial public offering

SAN FRANCISCO CHRONICLE

SAN FRANCISCO — Visa Inc.’s upcoming initial public offering is shaping up to be this year’s hottest ticket on Wall Street. But should individual investors try to crash the party?

It all depends, market pros say.

First, a little background. San Francisco’s Visa, the world’s biggest processor of credit and debit cards, is the dominant power in one of the world’s fastest-growing businesses — using electronics to make payments instead of cash or checks.

Its IPO, expected to take place at the end of March, will be the biggest in U.S. history by a long shot, raising more than $18 billion. And with as many as 446 million shares to sell, anyone willing to pay the price likely will be welcome at the table, whether they’re a hedge fund manager in Greenwich, Conn., or a shoe store owner in Fresno, Calif.

There’s little question that Visa has a strong business, analysts say.

Visa is the top electronic payment processor worldwide. It handled more than $3.2 trillion in electronic payments and related transactions in 2006, holding a wide lead over MasterCard, which followed at more than $1.9 trillion. American Express was third, with transactions of $562 billion.

The electronic payment industry is mushrooming as plastic replaces cash and checks for routine transactions. It’s now possible to use credit and debit cards to pay for everything from parking meters to vending machines to income taxes. Visa’s revenue jumped 33 percent in fiscal year 2007 to $5.2 billion.

“It’s a great company,” said Kathleen Smith, a principal of Renaissance Capital, a Connecticut firm that tracks the IPO market. “We think it’s a very interesting IPO.”

Just how interesting, though, will depend on the price at which the Visa stock is offered.

When payment rival MasterCard went public two years ago, it sold shares at a price about 15 times its earnings. Since then, the stock has roughly quintupled. Factor in MasterCard’s profit gains in the intervening years, and shares now trade at approximately 22 times earnings.

The MasterCard example is coloring everything about the Visa IPO.

Visa’s underwriters figure that MasterCard set its IPO price too low. They’re pegging Visa’s offering not to what MasterCard sold for two years ago, but rather to where MasterCard stock stands today. Visa’s indicated IPO price between $37 and $42 per share would put it at about the same value as the roughly 22 times earnings that MasterCard stock sells for now.

What that means is that the Visa IPO won’t be as cheap as MasterCard. Visa buyers are not likely to see the kind of outsized gains in the first few years after the company goes public that investors in the MasterCard offering did. And if Visa’s IPO price were to climb above the indicated range, the deal would become increasingly expensive and correspondingly more risky.