Investors opened up their arms and wallets for Visa's (NYSE:V) long awaited initial public offering (IPO) on Wednesday, making it the largest in U.S. history. Concerns had mounted over whether the volatile economic environment was conducive to IPOs, but even as the Dow Jones Industrial Average dropped nearly 300 points, investors snapped up shares, sending the world's largest processor of credit and debit cards soaring.
Monstrous IPO... For A Credit Company?
Visa's IPO was priced above expectations at $44 per share, but shares soared as high as $69 in trading, and ended up closing 28% higher at $56.50. The 406 million share offering was so oversubscribed, that the underwriting banks involved exercised their option to buy an additional 40.6 million shares of common stock at the IPO price of $44. The net proceeds for Visa, deducting estimated underwriting expenses, are around $19.1 billion. This makes the IPO by far the biggest in U.S. history, leapfrogging AT&T's $10.6 billion offering, and puts it awfully close to taking out the $19.1 billion offering from the Industrial & Commercial Bank of China as the largest in the world's history. (For everything you ever wanted to know about IPOs, read our IPO Tutorial.)
How, you may ask, does a credit card company's IPO go off with out a hitch when the market is scared of anything to do with credit? Unlike other credit card companies who lend, Visa carries no consumer debt on its books. The company is completely insulated from the current credit crisis. It makes its money from transaction fees which have been rising nicely. Visa handled more than 44 billion transactions last year, totaling around $3.2 trillion, much more than its main competitor MasterCard (NYSE:MA), whose shares are up over 450% since its IPO in May of 2006.
Good Sign for the Markets
This exuberance for Visa's IPO was a healthy sign for the broader market. For such a large IPO to be priced higher than expectations and be oversubscribed was quite a feat. This shows that investors are not just pulling there money and running. Paired with the heavy volumes in the market, I think it is a sign of volatility rather than an ensuing crash. The Dow was up more than 400 points on Tuesday, and despite giving up much of that gain on Wednesday, it is a sign that people are not afraid of buying.
Should Investors Buy after the Run Up?
People often have the misconception that IPOs always do well after their debut. This is not the case. Some, like MasterCard, are phenomenal, others like Blackstone (NYSE:BX) have been far from impressive. With anything in investing, it is a case by case basis. I think with Visa's insulation from most of the market's problems makes it a good company to hold in a portfolio. The main risk with the stock is if lawsuits pan out against Visa. The company put $3 billion from the offering into an escrow account for potential liabilities from a lawsuit that Visa attempted to stifle competitors and fix prices.(To read more about failed IPOs, check out The Murky Waters Of The IPO Market.)
I think the stock would be good to add to the portfolio. An IPO is generally very volatile, though, and I think this will be especially true in the current market conditions. So, it may be wise to watch the ticker to pick it up on the dips.
The Bottom Line
Visa's IPO was the biggest in U.S. history and potentially the world. This feat, in an uncertain market, shows that not all is lost and that not all investors are running for the hills. Visa's business is quite attractive and is insulated from the current credit crisis. I think the stock is attractive, but with IPOs generally being very volatile, it would be wise to buy on the dips.