One day after the financial markets were shaken by the announcement that Bear Stearns would be bought by JP Morgan for $2 per share (this has subsequently been quintupled to $10 per share), another momentous event took place: VISA Inc. had its initial public offering (IPO). An IPO is the first offer of a private company’s shares on the public market. When securities are issued publicly, underwriters are usually involved primarily to price and sell the issue (the lead underwriters for VISA were none other than JP Morgan and Goldman Sachs).
On March 18, 2008, VISA sold 406 million shares at $44 – raising nearly $18 billion. Why is this so significant, you ask? Firstly, this is the largest IPO in history (the next largest was the AT&T offering which collected $11 billion in 2000); secondly, and arguably more important, it comes at a time when consumer confidence is low, credit markets are illiquid, and all the general “health” of the US economy is in question.
Many market commentators are viewing the VISA IPO as a test of investor sentiment in these new equities. One of the major concerns for any IPO, in the short-term, is establishing a stable share price – senior management is particularly conscious of this, as well as investors. An IPO underwriter (the banking group selling the issue) must engage in a careful balancing act: price the IPO too low and the company will fail to raise the most capital (and it effectively leaves profit to investors); price the IPO too high, and shareholder return will be low as share prices fall to reflect the true value of the company.
With all the hype surrounding the offering, it is not surprising that VISA stock opened at $60 per share (this would suggest that the offering was underpriced, leaving [$60 – $44 x $406M shares] $6.5 billion “on the table”)! Since last week, China Life has invested $300M in VISA, giving further legitimacy to VISA as a worthwhile investment.
To invest in a company whose primary business is lending credit – especially in light of the current subprime fallout – is risky, to say the least. In the coming months, consumers will likely be spending less money and charging less to their credit cards, even with the Federal Reserve slashing interest rates. Yet, one need only look at the performance of VISA’s major competitor for a hint of what may await gutsy investors.
MasterCard went public in May of 2006 at $36 per share. Since then, the stock has returned over 500%, trading over $200 per share. With such high barriers to entry for the industry, coupled with VISA’s brand-name reputation and a base of customers which is double MasterCard’s, VISA may indeed be a stock worth keeping an eye on.
1 comment:
Good posting.
Point of clarification. It's the largest IPO in U.S. history. I believe the largest IPO in world history was a $19 billion offering from the Industrial and Commercial Bank of China (ICBC).
Also interesting to note that Visa's one day share price appreciation was 28%. Google's was 18%, Mastercard's 18%, and Ebay 163%, just to name a few.
Another neat fact is that JPM stands to make $1.8 billion on this deal. BOA $625 million, Citigroup $300 million and so on. It certainly pays well to be an investment bank.
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