As Visa prepares for an IPO, it will benefit enormously from the fact that its global payments cousin paved the way.
Investors now are better informed about payments networks, and MasterCard provides an almost perfect valuation benchmark. When it went public in May, there were no comparables remotely as good.
Visa also can improve upon MasterCard's experience, particularly in dealing with legal liability and corporate governance, aligning the interests of managers and owners, presenting a cohesive global story, and differentiating its strategy from MasterCard's.
The principal motivation for Visa's IPO, as with MasterCard's, is to reduce U.S. legal liability. For MasterCard investors, potential liability for the interchange and American Express/Discover suits was a huge uncertainty suppressing valuation, thereby hurting shareholder banks.
However, the ultimate damages from both suits are likely to be relatively modest. While the arguments by merchants, Amex, and Discover that Visa engaged in illegal conduct are strong, establishing that they were materially harmed will be more difficult.
U.S. antitrust law is market-oriented. In the interchange suit, merchants must make a persuasive case that interchange was higher than it otherwise would have been from January 2004 through the IPO. Looking to U.S. market benchmarks, Amex's interchange is higher, and Discover's is lower but rising. Moreover, MasterCard has ample incentive to increase interchange — to spur additional issuance and use — despite the PR firestorm that would attend such a move.
Interchange is critical to the MasterCard and Visa business models, but U.S. banks were the direct beneficiaries of those policies. Therefore, it is hard to imagine they would not bear the lion's share of any settlement or judgment.
Framing potential damages in the Amex/Discover suit is more straightforward. Judge Barbara Jones ruled that prohibiting U.S. member banks from issuing Amex and Discover products was illegal. The current suit, being tried by Judge Jones, will almost certainly focus on the extent of harm to Discover and Amex.
Discover must convince the court that without the prohibition, banks would have issued and promoted its product: a less profitable product for them than Visa's, and a product offering lower interchange rates, lower spending, and weaker acceptance. It's that black and white.
Amex's argument is stronger. It offered banks higher interchange but competes directly with them, and the cards it issues through banks are less profitable than those it issues directly. New issuers such as Bank of America - which is issuing the cards in part in exchange for Amex's dropping its suit - have customers with Amex-issued cards. If they cannibalize one Amex cardholder for every six cards they issue, Amex at best breaks even. If they cannibalize cards that revolve, Amex's sacrifice is appreciably worse.
In any event, Morgan Stanley's Ken Posner contends, rightly, that none of the parties will be keen to reveal their economics in a public trial, suggesting they will be highly disposed to settle.
Establishing good, clean governance is another area where Visa can do better than MasterCard.
As part of its IPO, MasterCard established a charitable foundation that holds 17% of its voting shares and will be subsidized by MasterCard, keeping the foundation beholden to the management. The foundation insulates the management from independent shareholder influence.
Though the managers should be applauded for donations they charge to their personal cards, MasterCard's charitable contributions are after-tax funds, not pretax spending on developing products, customers, or processing business.
Visa should set up no devices or special shareholder categories to shield itself from its owners.
It is axiomatic that a company's managers and investment bankers should try to maximize value for the owners in an IPO, but MasterCard's management received options with a strike price set at the IPO price of $39 a share. This created a conflict of interest.
In the four months since the IPO its stock price increased 80% with no change in fundamentals, testifying the opportunity was undersold. Though pricing an IPO is not an exact science, more than $4 billion that could have been realized by banks and MasterCard was not. Its managers, however, benefited.
Any options issued to Visa's management should be priced independent of the IPO.
For payments networks, a coherent worldwide story is more compelling than a regional one. Visa has a hurdle. European bankers are less favorably disposed to markets than American ones, and there is at least a whiff of anti-Americanism in persistent comments that MasterCard and Visa are American, with the implication that somehow the interests of European consumers and merchants are ill served.
MasterCard left its European business under bank control. Likewise, Visa could not get its European banks wholeheartedly on board for an IPO. Its E.U. business has become increasingly autonomous. Visa's management needs to stanch the increasing regional division within its federation. It would benefit from more cohesion, not less.
Visa's IPO story would have been decidedly stronger if Europe were included and if banks there became customers with no special privileges.
Outside Europe, the clean break from bank control will help Visa fend off increasingly aggressive efforts by regulatory mandarins to treat it like a public utility.
Historically, MasterCard and Visa were mirror images of each other. Visa should spell out if and how it plans to differentiate its interchange strategy, the markets and business it intends to cultivate, and the information-based services enhancing its customers' profitability.
Lastly, Visa's managers should address forthrightly how they plan to transform it from an association to a company with a vigorously commercial culture.
By taking lessons from its cousin's IPO, Visa should be able to command a substantially higher valuation.
