Question: VISA FUNDS ITS FUTURE WITH RECORD-SETTING IPO

If ever a company needed a few billion dollars, it was Visa in late 2007. Still operating as a privately held joint venture owned by its member banks, Visa didn't have access to the stock market as a fundraising mechanism. Archrival MasterCard was reaping the benefits of its recent IPO, generating several billion dollars in fresh capital and creating the opportunity to use stock options to recruit and reward employees. Moreover, after settling lawsuits brought against it by merchants and two other credit card companies, Visa had rung up more than $4 billion in legal liabilities. Plus, the six large banks that made up the primary ownership group within the Visa association were desperately in need of cash to help ride out the recession and the credit crunch. On top of these challenges, Visa had to keep investing in new paymentprocessing systems and technologies as consumers around the world continued to increase their use of conventional credit and debit cards and as promising new opportunities such as mobile commerce were coming up to speed. An IPO could help solve all these funding dilemmas, but it would prove to be much more complicated than a normal IPO. One of the essential steps was creating a company that could actually go public. In late 2007, Visa Inc., was spun off from the Visa association as a wholly owned subsidiary.

This new firm is the company that actually filed the IPO-with the U.S. economy in the depths of the worst downturn since the Great Depression of the 1930s and the financial services industry in turmoil. One could hardly have picked a worse time to go public, as evidenced by the fact that the normal annual flow of IPOs had slowed to a trickle. However, Visa had several factors working in its favor. First, with one of the world's best-known brand names and a half century of growth behind it, Visa didn't need to introduce itself to investors the way most companies do when pitching an IPO. Second, in investor-speak, Visa had a wide "economic moat," meaning its revenue-generating capacity was safeguarded by barriers to entry-including a powerful brand, established relationships with millions of companies worldwide, and a global transaction-processing network-that new market entrants would find hard to overcome. Third, and most important from the timing perspective, Visa isn't really a financial services company in the sense of lending money or issuing credit cards, so it wasn't exposed to the credit meltdown the way banks and credit card companies were. Although it is intertwined with the financial sector, Visa is actually more of a data processing company than a finance company. In its prospectus, Visa indicated that it expected to net $16 or $17 billion from the IPO and intended to distribute $10 billion of that to its member institutions, use another $3 billion toward its legal liabilities, and reserve the remaining few billion for general corporate purposes.

This was a staggering amount of money to generate in an IPO during the best of times and an almost unimaginable amount to generate during the worst of times. But that is exactly what Visa did. It went public on March 19, 2008, and broke the record for the largest IPO ever by a U.S. company-over $19 billion after some optional shares were redeemed by the two lead underwriters on the giant deal, Goldman Sachs and JPMorgan Chase. As both an underwriter earning fees on the IPO and one of the cash-hungry member banks of the Visa association benefiting from the stock sale, JPMorgan Chase made over $1 billion on the deal. In a turbulent stock market and an even rougher economy over the past several years, Visa's new stock has fared well, all things considered. By late 2011, it was up around 30 percent from its IPO price. Archrival MasterCard's stock did slightly better, and both companies were outpacing the overall stock market by a healthy margin. Visa's growth in the coming years could be hampered by any protracted slowdown in consumer spending, because fewer purchases means fewer transactions for Visa to process. However, more transactions are shifting from cash to cards, mobile commerce is on the rise, and credit card use is only just beginning to ramp up in many areas around the world-and between its core processing business and recent acquisitions, Visa is positioned to benefit from all three trends.21

1. How might Visa executives use scenario planning in the budgeting process?

2. Could Visa have accomplished its funding goals through short-term or long-term debt financing instead? Why or why not?

3. As Visa continues to explore growth opportunities, should it consider becoming a lender by issuing cards itself or lending money to banks that issue cards? Why or why not?