SAN FRANCISCO — As part of readying itself for what may be the second largest initial public offering of stock in U.S. history, Visa USA has settled its longstanding litigation with American Express. The leading card brand will not bear the costs of the settlement itself but has instead passed it off to its issuers, including credit unions.
Under the terms of the agreement, American Express would receive $1.12 billion from Visa USA and the banks that were also named in the suit. The money will not come from the new company but from the proceeds of the company's initial public offering of stock that would otherwise belong to the credit unions and banks that issue Visa cards.
"The settlement will ultimately be funded by members of Visa USA–not Visa Inc.–through the company's retrospective responsibility plan, a series of agreements with U.S. financial institutions to fund financial obligations of certain litigation, including this case," the card brand said in the announcement.
Details of the "responsibility plan" were discussed in the company's filings with the Securities and Exchange Commission, but company spokesmen declined to discuss the details further, citing SEC rules.
"Visa is doing what is in the best interests of its membership and the new organization," said Visa Inc. CEO and Chairman Joseph W. Saunders. "Our retrospective responsibility plan and these settlement agreements reduce risk and uncertainty for our members and Visa. I believe this is a positive resolution for Visa and its financial institutions."
The reticence to speak about the terms of the deal also ran to analysts as well as former Visa board members. Robert Hackney, president of Card Services for Credit Unions, the association of credit unions which process their card transactions with Fidelity National Information Services, was a member of the board which went out of existence when CSCU restructured its board to become a corporation versus an association. But because of his immediate past participation in the board, Hackney would not comment on the settlement with American Express or the IPO.
One executive with a processor who also asked to only speak generally about the deals stressed that he saw the deal as good for both Visa and its issuers, including credit unions. Yes, credit unions and other issuers were going to have to pay for the settlement, he acknowledged, but not out of current revenues or with cash on hand. In exchange, Visa and its issuers face fairly clear sailing, in terms of legal conflicts, and a wide open market to serve the planet's booming consumer economy.
The outlook for the initial offering is rosy. Visa told the SEC on Nov. 9 that it planned to raise $10 billion through the offering. By comparison, AT&T in April of 2000 garnered $10.6 billion in its initial offering.
MasterCard raised roughly $2.5 billion in its May 2006 offering and has since seen shares rise five-fold.
Visa told the SEC that it earned $771 million on revenue of $3.73 billion for the first nine months of the year and $437 million on revenue of $3.91 billion in 2006. It also said it processed 44 billion transactions worth about $3.2 trillion in 2006 compared to almost 24 billion transactions worth $1.9 trillion for MasterCard.
Visa didn't indicate how many shares it planned to offer or what its anticipated ticker symbol would be. Analysts have estimated that the IPO could hit the exchanges as early as 120 days after the restructuring as a corporation is complete.
Analysts have pointed out that one key change in how Visa does business may come in the form of a much more open attitude toward sharing information with the public and the market. As an association, Visa was notoriously closed mouthed about many elements of its operations, a practice which irritated, at different times, its issuers including credit unions, financial regulators, legislators and retailers. But that approach will not fly, analysts predicted, once Visa becomes a publicly traded company.
Under the terms of the deal, Visa will sell approximately a 51% interest in the company to the public through so-called Class A shares. The rest of the shares–Class B held by Visa USA members and Class C held by other financial-institution members internationally–have no voting rights. Visa's new 18-member board of directors, however, has seven financial-institution members from various regions. The others are chief executive officer Joseph W. Saunders, who is chairman, and 10 independent directors, according to the company's filings.
But not everyone is completely confident of the card giant's chances of reaping such a large reward from its offering. A number of analysts, particularly those based in Europe and the United Kingdom, have expressed worry about whether the company was making a mistake by issuing the IPO in the face of market and economic instability.
The analysts pointed out that while MasterCard has done very well after its IPO, Discover Financial Services has generally seen a decline in the wake of Morgan Stanley spinning it off. Further, they also pointed out that Visa success comes from consumers being willing to use their Visa credit and debit cards to keep on making purchases. If the economy experiences a significant slowdown that prevents consumers from making those purchases, they said, the result will be a drop in card usage and Visa profits.
–dmorrison@cutimes.com
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