|
MasterCard's Master Plan Leads To NYSE Offering |
|
BY AMY REEVES |
|
INVESTOR'S BUSINESS DAILY, |
|
mastercard.com, Lead underwriter:,Goldman Sachs |
|
In its fifth month, the 2006 initial public offering market is pulling out the big guns. |
|
May will see the arrival of household name Burger King and buzz-heavy Vonage. But dwarfing both those deals will be MasterCard. |
|
With an expected take of around $2.5 billion, it's the most lucrative offering the market has seen since Genworth Financial (GNW) hit the scene in April 2004. And along with Burger King, it's probably the best-known name to debut since Google, (GOOG) which arrived a few months later. |
|
Nonetheless, the credit card giant comes to market in the midst of a restructuring, undertaken partly in response to litigation that's been dogging the firm for some years. The changes, which include creating a charitable foundation, may help the firm's public image but might hurt its bottom line. |
|
"I don't understand the $40 million charitable contribution," said Francis Gaskins, president of IPO Desktop. "I think the interest is based more on their pricing than on their business potential." |
|
THE COMPANY |
|
MasterCard International was formed in 1966. For decades it was owned by the affiliated banks that issued the cards, for which MasterCard performed transaction services connecting the banks, merchants and consumers. |
|
In 2001 MasterCard Inc. was incorporated as a Delaware stock corporation, with MasterCard International as a subsidiary. The IPO is part of a further restructuring that the company feels will make its governance structure more stable and transparent. After the offering, the banks will own about 45% of the company and be less heavily represented on its board of directors. |
|
This change is especially important in the face of litigation that MasterCard and its rival Visa are facing. The Department of Justice charged that the system of "dual governance," where a bank has someone on the board of one credit card provider while issuing cards by the other provider — amounted to illegal collusion. More recently, merchants sued claiming that MasterCard and Visa were colluding to drive up their transaction fees. |
|
The company now operates in 40 countries and involves nearly 25,000 financial institutions and 24 million commercial locations. In addition to the self-named card, it also manages MasterCard Electronic, Cirrus and Maestro cards. |
|
RISKS/CHALLENGES |
|
The litigation and increased government scrutiny obviously presents a major risk. Aside from the legal costs themselves, there's also the risk of greater restriction on how much MasterCard can raise its fees. |
|
After the offering, the firm will no longer have the right to impose special assessments on its member banks. This also means the company does not expect revenue growth in 2006 to match that in 2005. It also means S&P expects to lower MasterCard's credit rating after the IPO. |
|
Competition in the field is growing, especially as banks consolidate. A MasterCard client bank may be bought by a bank with ties to one of MasterCard's rivals. Another type of rival is debit cards, a space that MasterCard is trying to get into but in which it's still a minority player. |
|
Bank consolidation also means fewer customers on which to depend. Currently the top five customers provide about a third of MasterCard's revenue. |
|
USE OF PROCEEDS |
|
MasterCard expects to net about $2.43 billion from the offering, or $2.61 billion if the underwriters exercise their options to purchase more shares. About 10% of that is earmarked for the MasterCard Foundation, an educational charity. Another $650 million will go toward general corporate purposes, including expansion and litigation defense. The rest redeem shares from the existing stockholders. |
|
THE RESULTS |
|
Revenue last year rose 13% to $2.9 billion. Operating income rose by the same amount to $393 million. |
|
The first quarter of this year was a similar story, with revenue rising 12% to $738 million and operating income up 20% to $183 million. |
|
THE MANAGEMENT |
|
Robert Selander |
|
President, CEO and director |
|
Joined MasterCard in 1994 and attained his current post in 1997. Before that he spent 20 years at Citicorp. |
|
W. Roy Dunbar |
|
President, global technology & operations |
|
Joined in 2004 after 14 years at Eli Lilly, (LLY) where he was president of the Intercontinental Region and chief information officer. Also a director at EDS Corp. (EDS) and Humana. (HUM) |
|
Alan Heuer |
|
Chief operating officer |
|
Also head of the Customer Group, which he has led since 1999. Became COO in 2004. He first joined MasterCard in 1995 from the Bank of New York. (BK) |