Litigation, Divergent Europe Among Risks Visa IPO Faces

Like MasterCard Inc. last year and Discover Financial Services LLC later this week, Visa Inc. is preparing to become the third standalone, publicly traded payment network. But a registration statement Visa filed Friday raises plenty of questions about the risks the world's largest card network faces in a litigious and increasingly competitive industry. The huge Securities and Exchange Commission filing?843 pages in electronic form?details the legal and competitive risks Visa will face when it sells 51% of its shares to the public, probably within three months after a planned restructuring that will unify its disparate regional operations except Visa Europe as subsidiaries of Visa Inc. Some of the most notable risks center on Visa's potential legal liabilities and the exclusion from the restructuring of Visa Europe, Visa's second-largest region, which includes Western and Northern Europe. After the IPO, a so-called litigation committee will oversee an escrow fund into which Visa will deposit an unspecified portion of the stock sale's proceeds. The legal risks stem primarily from lawsuits pending in Visa's biggest region, Visa U.S.A. The well-publicized suits involve merchant interchange cases as well as challenges from AmEx and Discover over Visa's now-repealed bylaw banning bank members from striking issuing deals with competing payment networks. Visa faces about 50 merchant suits over interchange, most of which could be consolidated into a class action in U.S. District Court in Brooklyn, N.Y. The U.S. Department of Justice sued Visa and MasterCard 1998 over their anti-competition bylaws and won at the district and appellate levels. That opened the way for AmEx and Discover to sue on restraint-of-trade grounds alleging they lost potential business with banks during the years the rules were in effect. Visa also has paid $120 million to settle lawsuits in California and in federal court challenging its currency-conversion policies, but the $100 million federal part still awaits final court approval. Some reports have claimed Visa could face billions of dollars in damages should the merchants win over interchange, but at this point “nobody knows, really,” about the final outcome, notes consultant and former Visa International executive Eric Grover, principal of Intrepid Ventures in Menlo Park, Calif. Visa in 2003 settled the so-called Wal-Mart merchant class action over debit card acceptance for slightly over $2 billion. As Visa Inc. struggles to reduce its legal exposure, Visa Europe, which will be a licensee and own 11.7% of Visa Inc., will continue on the traditional path of ownership and control by financial institutions. The Europeans prefer the status quo as many countries on the continent, which already use the common euro currency, move toward a new payments scheme called the Single Euro Payments Area. “Visa Europe believes that by being owned and governed by its European member financial institutions, it will be best positioned to serve a borderless payment market in Europe, meet the goals of its member financial institutions, consumers, and merchants, and support the European Union's vision of a Single Euro Payments Area, or SEPA,” the filing says. The risk, however, is that Visa Europe and the rest of Visa could diverge in technology and other operational matters, undercutting the scale and marketing advantages of a unified organization. MasterCard addressed that issue before its IPO by centralizing its formerly decentralized operations. “You're going to have a bifurcated Visa,” says Grover. Even Visa acknowledges that risk. The filing notes that Visa Europe in June 2006 began operating an authorization system separate from the rest of Visa, and is planning its own processing and settlement systems that will require both organizations to ensure ongoing interoperability. MasterCard faced most of the risks Visa details, though not to the same degree, but it has thrived in its first year as a public company. MasterCard went public in May 2006 at $39 a share and since then its shares have risen nearly 300%. Grover doesn't expect Visa's stock to repeat that spectacular run, mostly because the market has better knowledge about the payments industry than it did a year ago. But Visa may be able to get a better price from the start because of that very market knowledge, thereby reaping for itself some of the gains that MasterCard's shareholders, not the company, got when MasterCard priced its shares. “They're going to raise a lot more than MasterCard did,” Grover says. For the six months ended March 31, Visa U.S.A. reported operating revenues of $1.66 billion, up 13.2% from $1.47 billion a year earlier, and net income of $385 million, an increase of 80.8% over $213 million for the equivalent period. The IPO could happen late this year or 2008. Financial institutions will be banned from selling their shares for three years.