Visa IPO Enthusiasm

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Rare is the investment newsletter that hasn’t opined about the Visa IPO. In the wake of the Bear Stearns fiasco, the frantic bucket brigade by Hank Paulson and Ben Bernanke, frantic inflation, $100 oil, $1,000 gold, and a zillion other terrifying things, the thirst for a successful investment is almost debilitating.

Which means that anyone who promises you that he can help you profit by getting on the right side of the largest IPO in American history — which Visa stands every chance of being — is going to get your attention.

So … have I got your attention? Because I promise …

Just kidding. All I can promise is to share my opinion. Like many of the rest of you, I find the Visa IPO somewhat alluring — we are not blind, we have all seen the performance of Mastercard over the past couple years, and we know that Visa has about twice the market share of Mastercard. This is a rare thing indeed, a global duopoly, and the smaller participant in the duopoly has been public long enough to make everyone comfortable with their business model and get the “big brother” a decent price as they sell to the public.

So the banks and other owners of Visa aren’t stupid. They’ve seen that Mastercard was dramatically mispriced when it went public, and they know that now that MA is one of the few strong performers in the consumer debt space Visa has an excellent chance of a great performance on the public markets straight out of the blocks. And it won’t be priced at a deep discount as Mastercard was — a discount maybe, depending on how you argue this point, but not a deep one.

But you all know this — what on earth can the newsletter advisers sell us to make our understanding of Visa greater, or improve our chance of profiting from the IPO?

Well, first of all, none of them can get you shares. If you’re crying at your broker’s doorstep trying to get shares in the initial IPO allocation, don’t give up your place in line there just to throw some money at George Yared (for example — he’s just one of many who have an “angle” on the IPO that they think they can sell you). Your broker is the only one who can get you an IPO allocation, and probably only if he really likes you, since the allocations are reportedly pretty tight. Most people are unlikely to get as many shares as they want, and the small fish are rarely the winners in that scenario.

So sticking with George Yared, what is he offering?

Well, we can take a few clues — he compares Visa to Google (based on market dominance, not, obviously, on business specifics), and notes that “My meager 40 shares of Google, snatched at the IPO for $105, are worth five times what I paid for them today.”

So, if he bought them at $105, we know he didn’t get them in an initial allocation. The IPO was priced at $85 through their auction process, so that’s what the initial allocations cost. You could have done better than $105 at several times during the day that GOOG went public, it closed that day at just about $100. Remember how many people were wildly pessimistic about that one? The initial price estimate was $108-135, and they cut it dramatically right before the auction because people didn’t believe Google was worth that huge market cap (at the IPO, the market cap of the entire company was set at about $26 billion, which is of course a small fraction of the capitalization of $135 billion today).

What else does he say to entice you to join his GameChangers service?

Well, to put it bluntly, he claims that his age and experience will enable him to tell you how to buy or trade the IPO:

“Buying shares at (or around) an IPO is an art. What you say to your broker, when you buy on the open market, how to gauge if you should add to your position, whether or not you should adapt your strategy on the morning of the IPO, the signs you should watch for in the first 3 or 4 weeks…all this effects the profit you make…. But you don’t have to learn all this on your own. I am offering my experience (and all these lines on my face!) every step of the way.”

“We’ll follow the initial pricing, the valuation, the allocation issues, but we’ll also dig into Visa’s GameChangers strategy. This is where it gets really exciting, because how Visa plans to use its new $5 or $6 billion in cash is truly jaw dropping!”

That appears to me to be a bit of a stretch. It seems fairly clear that they’re using the proceeds for a warchest for lawsuits (much like Mastercard, being a duopoly that, it has been argued, colludes on pricing, brings on some antitrust and other legal attention), and to expand their chip and wireless payment platforms (that is, the “touchless” payment cards and mobile phone payment technology), in addition, I’m sure, to continuing to expand the brand globally. More or less the same stuff MA is doing.

Whether you believe this adviser, or any other, who tries to tell you that his “experience” will chart a success on this one trade is up to you — but I’d suggest that since this IPO is quite unique, they’ll just be guessing like you will be. Long term, I’m quite sure Visa’s business will be successful, but I don’t know what kind of valuation it will get in the market in two or three years and I would certainly never promise that I could tell you how to trade in and out on the IPO day or in the weeks to come.

The advisers who make their money by convincing you that they can help you trade around IPOs and breakout stocks are probably all having trouble picking up new subscribers at the moment, so it’s easy to understand why a single massive IPO, even if it stands alone as a single event and probably isn’t much of an indicator for the overall IPO climate, can get their juices flowing and their emails flying. I don’t know if any of them will have better advice than others, but I think that it would behoove us to be careful: This is the largest IPO in US history, possibly the largest in the world’s history (depending on how it prices today), and it’s opening during a market panic that is caused in part by the banks that own most of these Visa shares. That’s an odd situation, and I think if anyone says they know how it’s going to work, they’re just as likely to be right as you are.

I’m interested in Visa, too, but I will note one thing: I have never before seen an IPO where the fans are so dominant or so unanimous in their predictions. Criticism of the company, the price range, or the IPO has been nearly nonexistent. It’s opening at a fairly high PE ratio, during a possible recession, but it’s also a market leader in a tightly closed global market and it’s expanding into new markets and new payment types all the time. What makes me more nervous than anything else is that every single adviser I’ve heard or read says good things about the company and says they want to buy it (though some are conservative and hope to see the shares dip in the coming weeks first).

If EVERYONE says they want to buy it, we should be at least a little bit nervous — especially because many of these advisers, talking heads, and investing pundits might in part be stretching out to find anything positive to recommend in this crazy environment — the perceived safety, size, market dominance and growth of V is hard to resist, and if “everyone loves it” it’s easy for all pundits to get behind it — they won’t be going out on a limb, and if they’re wrong so is everyone else, so no one will care.

I haven’t decided yet whether I’ll try to buy shares — since I’m writing about it here today it will be at least Friday before I place an order, but I will be watching Visa trade, and Mastercard to see if there’s any impact on their shares or valuation. Following is a rogues gallery of the other folks who have opined on this one … if you can find a real negative comment about the IPO (stronger than, “be cautious about the price and maybe buy a little later), I’d like to see it.

Ann Sosnowski

Jim Cramer

Jason Kelly

Ian Cooper

(Ian and Ann, I’m sure, will continue pushing their recommendations of the IPOSX mutual fund — a high cost way to get exposure to most IPOs. That seems to be extra crazy to me as a back door into Visa. At a time when there’s only one IPO that anyone’s interested in, and most IPOs remain unprofitable or marginally profitable, and often debt-dependent, why bet that the whole IPO pipeline will revive and bring back the crazy IPO bubble days?)

Some bloggers:

Vivek Kumar (overall data on the IPO)

Michael Shedlock

Seeking Alpha

BloggingStocks

Fortune

Adam Levitin (good analysis of liability and Visa’s future)

Floyd Norris

So … that ought to be enough to get all of us confused, in most cases ragingly bullish, and at least fairly well informed about the specifics of the offering.

Back to more sleuthing and teaser ads next, but in the meantime feel free to opine below about Visa — from the email I’m seeing, nearly all of you are at least interested and many of you want to know how to get shares on the initial allocation (call your broker, but don’t hold your breath) … who’s feeling nervous or cautious? Anyone out there have a plan to buy shares next month, or a chart that tells them the perfect time to buy will be a 12:15 on Thursday?


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17 Responses to Visa IPO Enthusiasm


  1. As per my knowledge this ipo is being offered to the big shots with portfolios waging $250k plus. Big line for this one…wonder if this is gonna play out like the sale of PS3′s.

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  2. I called my broker to find out when options will be available for Visa. It will take at least 30 days, or longer. There is a really great options website you can go to http://www.888options.com that Schwab referred me to– one way to play this, at a later date, for those of us who can’t obtain IPO shares, or want to wait to play it–watch for when options become available. Hope this helps.

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  3. I was reading that the Visa IPO is timed for now because the same Banks that have ownership in VISA are so cash strapped, that they’ll sell a portion of their ownership for the cash they desperately need. Sure it will create 6 billion more new dollars for VISA, but the rest of the IPO cash will go to the banks. If Visa was such a good business then why are the banks willing to give up some of their ownership in it?

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  4. Thanks for the comments, folks — yes, I imagine it’s too late for much of anyone to get the initial allocation here, it ought to be pricing in the next couple hours. If I were buying shares in Visa right away, (and I’m not), I would probably pick up half of my position tomorrow an hour or so in and hope for a price under $45, and I’d wait a few weeks to see how it performs with the market before filling my position. That’s the coward’s approach for someone like me who has no idea whether the shares will double immediately or spend a few months around $40, or something inbetween.

    And yes, as with Mastercard most of the money is going to the banks that owned the Visa cooperative before it converted to a corporation last fall. I think they’re selling because it’s not their core business, because they would rather cash out that invest heavily in Visa’s expansion, and because there are liabilities that they’d be happy to get away from. One interesting thing to consider is what Visa and MA will look like in a few years when they are significantly more independent from the banks that issue their cards — more collusion? Possible price competition or a pricing war? An entry point for Discover to finally get some traction? Will we eventually see some real differentiation, a world where some people accept MA but not Visa or vice versa?

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  5. Jerry’s response to James:

    It is always easier to sell something in bad times that has a demonstrable profitable track record, then something which has a negative track record which is bank stock of Citigroup, Bank of America and other financial institutions which may have to sell out more of themselves to the SWF’s to stay solvent.

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  6. I found it refreshing that the tease for Yared`s newsletter was no tease. I did talk to My Morgan Stanley Broker who has worked for Yared over the years,and his credentials are not overstated.
    As you said the allocations for V (Visa) are
    tight but this one does stand to be a game changer.
    At least until the antitrust guys get jealous.
    Remember Microsoft`s battle. As for Discover?
    See them roll over and pee on themselves next to
    the power of Visa with a 19B war chest.

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  7. All of this about Visa is too much like folks sleeping on the sidewalk to have a place in line for the new hot movie or store opening. A month or two from now it will be all forgotten. This is late March. One of the Newsletter Gurus said we are overdue for a two-week bear-market rally very likely spurred by the current events on Wall Street and within the Beltway. Whatever. Sub Prime peaks in April. One-third more foreclosures than this month. The Market will probably be just as crazy and still in a crash dive at Easter. BUT then the monthly foreclosures will start to taper off. May and June should look like this month and last month respectively. Time enough to get excited about Visa then when we see how it all plays out. FWIW, check out the Credit Suisse graph under Mortgage Resets before you put away the bottle of smelling salts.

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  8. Mastercard and Visa have a class action lawsuit against them by various associations of restaurants, retailers, gas stations etc. etc. In other words they are hated by the very retailers that they make money from. Congressional hearings are ongoing. For details go to nacsonline.com (website for the National Association of Convenience stores).

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  9. As the real estate market is deteriorating, the credit markets are crumbling at the edges as well.I would avoid any financial market at this time until more certainty and better evaluations paint a more reliable background. Being in debt today is not a bad thing because you are paying the debt back with devalued dollars.

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  10. Heck, it can’t be THAT hard to get shares at the IPO price… I just filled my order at $44.00 and left over 100k shares on the table unexercised. It will be good to have my residuals available to others to buy.

    Good luck, everyone!

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  11. Mike,,,,,,,,
    I am not sure what you believe you did, but we must assume you put in a limit order @44.00,( Or you think you got allocated shares for tomorrow). Better check back in the morning to see the trading prices for V. Here is the Headline on the IPO Offering:
    Visa IPO Charges Ahead, Raising $17.9B
    By MICHAEL LIEDTKE,AP
    Posted: 2008-03-19 01:56:35
    SAN FRANCISCO (AP) – The credit crisis that has been haunting the stock market for months wasn’t enough to scare investors away from the IPO of the world’s largest credit card processor.

    Overcoming the jitters that have battered many of the lenders that issue its cards, Visa Inc. sold 406 million shares at $44 apiece late Tuesday to raise nearly $18 billion and complete the most lucrative initial public offering in U.S. history.

    The price topped the range of $37 to $42 per share that Visa set three weeks ago, reflecting high demand to own a piece of a company that’s promising earnings growth of 20 percent despite a credit crunch that’s choking the U.S. economy.

    “This shows that all the recent financial turmoil obviously hasn’t bothered a lot of people,” said Nicholas Einhorn, an IPO analyst for Renaissance Capital of Greenwich, Conn.

    Investment bankers could still exercise an option to buy another 40.6 million Visa shares during the next 30 days. If that happens, Visa’s IPO will end up raising $19.7 billion before expenses.

    Visa faces another litmus test Wednesday when its shares are scheduled to begin trading on the New York Stock Exchagnge under the “V” ticker symbol. The San Francisco-based company will make its debut with a market value of about $36 billion.

    Based on the strong demand among money managers who wanted a piece of the IPO, Einhorn anticipates Visa shares will quickly soar above $50.

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  12. Well, that enthusiasm sure held through for the day today. Folks are ecstatic to have any kind of positive story to cover, and investors are over the moon about a stock that’s got massive buying interest. Congratulations to those who did get in on an initial allocation at $44, you’ve got a nice paper profit already with the price still above $60 this morning. And Mastercard’s going up, too, so clearly there’s a lot of enthusiasm for this small, two company sector of electronic payments networks that don’t hold consumer debt. I’ll be curious to see where this one stands in a few weeks.

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  13. Went up to 69 today then came down to 56. Gumshoe, you’re right, this one’s going to be volatile, just like the rest of the market. But it does appear to have potential long term. I am concerned though about the remaining shares owned by the big banks as they sold around 3.5 Billion dollars for the IPO but still hold about 6 Billion dollars worth of shares which are subject to a Lock Up period so they can’t sell just yet. But does anyone know when that lock up period expires? Banks like Citicorp could eventually dump a lot of stock if their financials don’t improve and that could really drive Visa’s price down in a hurry.

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