Investing Blog

The credit card company Visa will IPO sometime around March 20th to raise around $19 Billion. While this would be a good chance for the company to raise more capital, it looks like a selloff rather than an attempt to raise money.

The chances of Visa gaining any more marketshare is bleak. A $19Billion cash infusion will do little to get the business on its toes and more likely line the pockets of the banks that own it. The banks that currently own Visa are likely to get $10 Billion in immediate proceeds from sale of stock if the company IPOs for around $18-20 Billion.

Mastercard went public in May 2006 and has since quadrupled in value. It is likely that investors expect the same run from Visa which issues its own lines of credit and also profits off the merchant fees it receives on each transaction.

The problems with Visa are threefold.
1. Visa offers its own credit cards to high limit borrowers. As the credit crunch goes on, it is likely to see some losses stemming from defaults of consumers on their own cards. While Visa is known as a network rather than credit issuer, it does in fact issue its own cards with its own credit. Credit card debt is often the last paid off and the first debt put into bankruptcy, it wouldn’t be safe to hold this debt.

2. The credit crunch is likely to slow the amount that people spend. As banks lower the available credit, less gets spent and Visa collects less in merchant fees than it did in the credit explosion. The housing boom greatly increased the amount of available credit but as it falls out, the credit market is retracting. I think credit cards will see lesser spending than previously thought.

3. The banks want out. It would make very little sense for banks to sell off one of their only constant streams of income. Visa makes money regardless of interest charges, benefiting from the network of storefronts that pay fees to have access to its customers. Its obvious that they banks expect Visa to underperform and might just be getting a last second sale.