Summary
Since 2004, AmEx and Discover has battled with Visa and MasterCard over alleged exclusionary practices, which led to antitrust suits against both parties, contending they engaged in illegal practices to stifle competition. AmEx dropped its action against three of the bank defendants who became AmEx issuers, including Bank of America, Household Int'l and USAA Federal Savings Bank. Visa opted to settle the lawsuit with AmEx for $2.1 billion because Visa didn't want the suit hanging over its head in the midst of their pending IPO scheduled for early 2008. On Friday, 11.9.07, Visa filed its $10 billion much anticipated IPO with the SEC. As of 2006, Visa market share was 44% and Visa processed over 44 billion transactions worth $3.2 trillion. The new Visa Inc. will include the Canadian, US and Int'l operations and the European Unit will take a minority stake in the new Visa. Barclays is the biggest Visa card issuer in Europe and is expected to gain a huge windfall from the deal.
Analysis
Without admitting any wrongdoing, Visa has opted to settle its three year lawsuit with AmEx for $2.1 billion. AmEx alleges Visa and MasterCard engaged in deceptive practices which caused damages in their ability to enter into agreements with Visa's and MasterCard's member banks. Visa's settlement with AmEx paves the way for its 2008 planned $10 billion IPO, without the distractions of an antitrust lawsuit hanging over its head, which could have had a negative impact on its share offering price.
1. MasterCard, who owns 31% market share, is still on the hook with AmEx and Discover in the pending antitrust lawsuit, scheduled in September 2008. MasterCard, who's share price has grown roughly five-fold since its IPO in May 2006, plans to vehemently fight the suit with AmEx unless a settlement can be reached before the case goes to trial
2. AmEx's 4th Qtr. windfall of $1.13 billion is not expected to boost AmEx's profit during the quarter because AmEx plans to use most of the money to pay for a rewards program that gives away free products and services to big spending cardholders, however, the settlement by Visa is seen as a victory for AmEx and AmEx vies to pursue its case against MasterCard for damages, which could reach $1 billion or more
Takeaway: Thanks to the continued growth of credit and debit card transactions worldwide, which is projected to more than double by 2010, investors will likely have a huge appetite for Visa's shares. Since Visa and MasterCard receive interchange fees for every transaction, they aren't exposed to bad debts on cards bearing their logos, which may bode well for its shareholders JP Morgan Chase, Bank of America, Citigroup and Wells Fargo.
