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MasterCard Stages Solid IPO
Firm's Shares Jump, but Is
Plastic Elastic Enough for Outlays?
May 26, 2006; Page C3

As Mastercard International settles into a public-ownership structure for the first time in its 40-year history, investors will need to gird themselves for some bumps in its financial performance for the rest of 2006.

The payments network is doling out big incentives to encourage financial institutions to issue its branded credit and debit cards, pouring advertising and marketing money into next month's World Cup soccer tournament, and is expected to hand over $40 million to establish a charitable foundation that will be based in Canada.
[One Word: Plastic]

MasterCard International already has warned that it may lose money this year and is likely to see "a significant negative impact on our second-quarter net revenue growth," according to documents filed earlier this month with the Securities and Exchange Commission. The company also faces antitrust litigation from merchants who accept its card brand and are rebelling over rising fees associated with their use. The legal issues aren't expected to be resolved this year.

Investors largely dismissed the short-term outlook yesterday, snapping up shares of the powerhouse brand in its initial public offering. The IPO, which represents 46% of the company's equity, posted a strong debut despite some last-minute concerns about the level of investor interest. Shares of MasterCard, based in Purchase, N.Y., premiered on the New York Stock Exchange under the symbol MA and surged $5.70 to $46, as of 4 p.m. composite trading on the New York Stock Exchange.

"MasterCard is a way to ride the tidal wave of growth in consumers' use of plastic. The more swipes made with that MasterCard card, the more money MasterCard makes," said Ryan Batchelor, an analyst at Morningstar Inc., who has placed an $80 value on the stock.

Although MasterCard's $39 IPO price represented a discount to the $40-to-$43 level that the company had initially expected, the card association still raised $2.4 billion in the offering. That made it the nation's largest IPO since Genworth Financial Inc. raised $2.9 billion in May 2004.

In another IPO development yesterday, boutique investment-banking firm Keefe, Bruyette & Woods told employees that it plans to sell 25% of itself in an initial public offering that could raise as much as $150 million. (See related article.)

MasterCard's solid first-day performance provided some relief to the IPO market, which was roiled Wednesday when Internet phone-service provider Vonage Holdings slid 12.6% from it offering price of $17 a share. Shares of Vonage lost another 12% yesterday to trade at $13, as of in 4 p.m. on the Big Board. The Holmdel, N.J., company faces stiff competition from well-heeled larger rivals and online start-ups.

MasterCard, too, operates in an extremely competitive environment. It is in a battle with Visa USA, the cooperative that dominates the payments industry based on the number of transactions processed each year. The two card associations, which don't issue cards or collect interest on unpaid card balances, make their money by providing networks through which card transactions are processed.

MasterCard CEO Robert Selander discusses the pricing of his company's IPO and litigation risks.

Although Visa and MasterCard are owned by thousands of financial institutions, they fight each other to win the processing business of those banks. They often are forced to provide a raft of rebates and incentives to the card-issuing institution.

MasterCard, for example, last month disclosed that rebates and incentives represented 23% of its gross revenue in the first quarter of the year, up from 19% in the year-earlier period. "We provided significant incentives to support the conversion of a large payment-card program to MasterCard," it said in the SEC filing, adding "we expect increasing incentives and rebates under our agreements with our customers and merchants to continue to largely offset [other revenue growth] throughout 2006."

MasterCard didn't identify the financial institution, but it is widely thought to be Washington Mutual. Last year, MasterCard snatched away the bank's fast-growing debit-card business from Visa.

Craig Maurer, an analyst at researcher Soleil Securities, placed a "buy" rating on MasterCard yesterday with a price target of $50. But Mr. Maurer expressed some concern about the amount of money that MasterCard may be spending for the coming World Cup in Germany. MasterCard is a major sponsor of the soccer championship. The card company hasn't disclosed the amount.

"It could be significantly higher than what anybody is estimating," he said. He projects MasterCard will spend $250 million for advertising and marketing in the second quarter, up from $183 million in the year's first quarter.
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