MasterCard Internationals purchase of the rest of Europay International is primarily intended as a challenge to the more recognized Visa brand in Europe and would give the combined company a powerful share of the debit card business.
The agreement, announced Wednesday, also raises questions about some elements of the antitrust cases involving MasterCard. Thats because to complete the deal, which involves exchanging Europay shares for MasterCard shares, MasterCard must convert from a membership-based corporation (or an association, as it and Visa call themselves) to a for-profit private share corporation.
Europay is to be the framework of MasterCards newly expanded European region and remain in Waterloo, Belgium. Its chief executive, Peter Hoch, would retain leadership of the region and report to MasterCard president and CEO Robert Selander. As with all MasterCard regions, Europe is to have its own board. European financial institutions would be free to promote both MasterCard and Eurocard brand cards.
If the deal goes through, MasterCard International, which already owns a 12.2% share of Europay, would become MasterCard Inc., with MasterCard principal members and Europay shareholders becoming equity owners.
The change in ownership structure is partly to facilitate the transaction, said David Ruth, a spokesman for Purchase, N.Y.-based MasterCard But if the transaction is approved the principal members of MasterCard will have a greater stake, since they will own shares. So the more business we do, the more value that brings directly to our owners.
The move would seem to increase competition with Visa International. Currently, members of MasterCards board are allowed to serve on Visas board.
But ownership in one company might add stress to dual governance, an arrangement that has concerned antitrust officials for decades and is a key issue in the still-undecided antitrust suit brought against the associations by the Justice Department before the U.S. District Court in New York.
During that trial, which was heard last summer, Visa and MasterCard argued that their association status justifies their exclusionary rules, which bar their respective members from issuing American Express and Discover cards though they can issue each others cards. They argued that because they are not for-profit companies, such as American Express and Discover, the exclusionary rules are not intended to gain dominance in the market.
Lloyd Constantine, the leading plaintiffs lawyer in the antitrust class action against Visa and MasterCard brought by Wal-Mart, said he doubted that the switch from association to private corporation would have any bearing on the associations defense of their exclusionary rules in the government case.
I dont think its significant. It was a silly argument to begin with, and I think Judge Jones saw right through it, he said, referring to Judge Barbara S. Jones, who presided over the case without a jury.
(The switch from association to private company could influence Mr. Constantines case. If the plaintiffs win, the change in MasterCards equity structure could theoretically affect the apportionment of damages. Mr. Constantine declined to speculate on the matter.)
Mr. Ruth said he did not know of anything in the Europay deal that would affect the rules concerning governance. Cheryl Heinonen, a spokeswoman for Visa, declined to comment on the duality implications of MasterCards structural change but said, We certainly are going to be looking at all aspects of the merger.
The deal needs regulatory approval on both sides of the Atlantic, and integrating a singularly European-focused company into a global business may prove difficult, some observers say.
Hans van der Velde, the president of Visa Europe, said the MasterCard-Europay deal is no threat to his company.
Its apparent that the merged organization is based very much on the Visa International model, he said. We are flattered. But the merger is, essentially, two weaker players coming together to challenge Visa. And mergers like this are notoriously difficult to implement. Often the projected synergies and cost savings are never realized.