MasterCard Inc. will end four decades as a private entity Thursday when the world’s second-largest credit card brand makes its long awaited debut on the New York Stock Exchange.
The Purchase, N.Y.-based credit card association is expected to raise $2.6 billion, according to conservative estimates, in its initial public offering, making it among the biggest stock flotations in recent years. By comparison, Google Inc. cashed out at $1.7 billion after its much hyped first day as a public company in 2004.
Most analysts contend that the credit card pioneer, which is owned by the 1,400 banks that issue its cards, will have no problem attracting investors when it begins trading under the stock ticker MA. MasterCard plans to offer a 46 percent stake by issuing 61.5 million shares priced in the range of $40 to $43 per share — an amount deemed affordable even for the smallest of investors.
The real uncertainty lies in what kind of an appetite Wall Street has for a company fighting dozens of lawsuits in which investors could be responsible for huge legal fees and damages. Litigation — including anticompetitive claims — has been the biggest question for investors ahead of the offering. But it’s also a big reason why the IPO is being undertaken in the first place.
MasterCard and larger rival Visa International face ongoing legal battles over what are known as interchange fees, which retailers pay the associations to process credit and debit card transactions. Merchant groups have already filed a class-action suit against the card associations alleging unlawful price fixing of fees that hurt both merchants and consumers.
Visa, which is also owned by member banks, has said it doesn’t plan to go public.
Once the IPO is completed, MasterCard intends to pump $650 million of the proceeds into a war chest to fight the litigation. In addition, the architects of MasterCard’s plan are betting the IPO will help diffuse the lawsuits, while also shielding member banks from being named in any future litigation.
“I’m kind of happy they have some litigation, because if they didn’t, they wouldn’t be going public and none of us would have the chance to buy an excellent firm in a really robust IPO market,” said Morningstar stock analyst Ryan Batchelor. “Obviously there are elephants in the closet, but this is a phenomenal brand and a good way to play on the global growth in plastic.”
Legal pressure didn’t even let up in the final hours before the planned IPO. On Tuesday, Mastercard disclosed in a filing with the Securities and Exchange Commission that it recorded $500,000 of legal reserves for a merchant chargeback-related lawsuit.
The lawsuit, filed by credit card billing services firm PSW Inc., alleged that MasterCard and Visa violated federal and state antitrust laws. PSW is seeking $60 million in compensatory damages as well as $180 million in punitive damages, according to the SEC report.
Meanwhile, both MasterCard and Visa have also been sued by American Express Co. and Discover Financial Services LLC, the credit card division of Morgan Stanley, for anticompetitive practices that blocked member banks from issuing cards on their rival networks.
“I don’t think anything is ever going to be behind them, the proper reserve for legal expenses is an integral part of their business,” said David Menlow, president of IPOFinancial.com. “Legal risk must be considered by everyone, but its not going to put the company out of business. And I don’t see investors shying away from a top name like MasterCard.”
Menlow points out the biggest security blanket that MasterCard has as it readies its IPO — the underwriters.
The firms involved in the IPO — led by Goldman Sachs & Co. — would likely step in to offer MasterCard a line of credit should it need more cash to pay legal bills beyond what has already been set aside. Other firms underwriting the deal include heavy hitters’ Citigroup Inc., JPMorgan Chase & Co., HSBC Holdings PLC, and Deutsche Bank Securities.
“They’re not going to be the ones that brought to Wall Street a major IPO doomed to failure,” he said.
Should MasterCard be held financially accountable in any of the litigation, the company said it could be forced to change its business practices. The company warned in its IPO prospectus that this could dent its profitability.
MasterCard recently posted a $126.7 million profit for the quarter ending March 31, up almost 36 percent from the year-earlier period, according a filing with the Securities and Exchange Commission. MasterCard also reported revenue rose almost 12 percent to $738.5 million during the quarter.
A spokeswoman for MasterCard would not comment on the IPO because the company is in the midst of a “quiet period” imposed by the Securities and Exchange Commission.