Last Updated: March 18, 2008: 11:35 AM EDT
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Visa's $15 billion IPO: Feast or famine?

The credit card giant's public offering, set for Wednesday, will test investor appetite in a starved market.

By Katie Benner, writer-reporter

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NEW YORK (Fortune) -- Visa's initial public offering won't just be the largest in history if it prices as scheduled Tuesday night - it will also serve as a barometer of the very health of the U.S. financial system.

"This market is so damaged that this IPO performance will be a test of investor courage to put new money into equities," says Kathy Smith, a principal at IPO research firm Renaissance Capital.

At no time have things seemed so bleak for the financial system. Venerable trading, brokerage, and investment bank Bear Stearns collapsed under the weight of the credit crunch - and was sold to JPMorgan Chase (JPM, Fortune 500) at a steep discount. Bond yields and markets for all but the safest assets have fallen into disarray; and all that regulators and economists can agree on is that no one knows how to revive investor confidence.

Enter Visa, which will is slated to trade Wednesday on the New York Stock Exchange under the ticker V. The credit card giant plans to sell 406 million shares for between $37 and $42 a share. Even at the low end of the price range, approximately $15 billion, it would dust the 2000 AT&T Wireless's $11 billion offering.

"Right now people believe nothing can get done, and human expectation plays a huge role in how markets function. If this is successful, it won't fix Wall Street, but it will help psychologically," says Chris Kelly, head of capital markets at law firm Jones Day. Visa also plans to offer an annual dividend of 42 cents a share.

Not only would a successful IPO improve market sentiment, it would be a major boon to banks that currently own Visa and have seen their values fall along with other financial services stocks. For example, JPMorgan's 29 million shares are worth approximately $1.1 billion, a nice sum that will allow it to more than cover the $236 million price tag for its purchase of Bear Stearns.

Other owners include Bank of America (BAC, Fortune 500) with 14 million shares that could sell for $546 million; Citigroup (C, Fortune 500), which could rake in $265 million; and National City (NCC, Fortune 500), a bank that stands to pocket $390 million.

The 43 banks underwriting the deal also stand to divvy up fees totaling $370 million, and some IPO researchers say they could top $500 million. They include JPMorgan Chase, Goldman Sachs (GS, Fortune 500), Bank of America, Citigroup, HSBC, UBS, Merrill Lynch, Wachovia and Wells Fargo. After months of taking massive writedowns on investments gone bad, banks could use a boost from Visa's IPO.

But Visa's timing isn't great. Even though the company's New York roadshow was standing-room-only and the IPO is reportedly oversubscribed, there's no guarantee that buyers will show up - especially given rampant rumors of more bank bailouts and shareholder anger over months of losses.

Fears of investor apathy is one reason why the IPO is set for Tuesday, analysts say.

"JPMorgan is the lead on the deal and Visa's largest shareholder. They knew probably better than most what was going to happen and accelerated the IPO just last Friday as they were negotiating to buy Bear Stearns," says Ben Holmes at IPO tracking firm Morningnotes.com. "Plus Visa has to get this done as part of its recapitalization and restructuring plan."

San Francisco-based Visa is the largest U.S. card company in terms of number of transactions and dollar amount. Its worldwide operations could deliver more than 18% compounded annual growth through 2012, according to filings with regulators. More importantly, Visa's business model should shield it from investor skittishness about loans.

Like Visa, its publicly traded rival MasterCard (MA) is a processor not a lender; and MasterCard has increased fivefold since it debuted in May 2006 at $39. Two years later, it trades at more than $220 and continues to deliver smooth double-digit earnings growth. Given the fact that Visa has double the customers and equally clean books, investors have been eager to get in on this IPO.

While the companies may be similar, the circumstances of their IPOs are very different. When MasterCard debuted, few people understood that it did not hold consumer debt, and the company was dealing with a cloud of litigation. Its underwriters were unable to move the stock at its target range of $40 to $43. Visa, on the other hand, has been hotly anticipated and may far exceed the high end of its target price. This means that investors have high expectations that Visa will perform well over time - always a risky proposition on Wall Street.

Moreover, as market turmoil has ramped up, even MasterCard has fallen. The stock is down about 3% since the beginning of the year and has been as susceptible to wild market swings as any company.

Some IPO watchers aren't sure Visa will follow in MasterCard's footsteps. "People are confusing MasterCard's established two-year track record with what could be a one-day sale on Visa," Says John Fitzgibbon, of IPOScoop.com. "The thinking is that Visa will perform in exactly the same way as MasterCard, and that's not true."

Whether or not Visa is as good a company as MasterCard may not matter much if the market tanks. The more important question is whether the first name in credit cards is financially sound enough to become a go-to stock in a sea of uncertainty.  To top of page

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