MasterCard Issuers Would Move to Minority Position Under IPO

PURCHASE, N.Y. – Credit unions and banks that issue MasterCard stand to lose control of the brand after an initial public offering which the number two card brand says will give it the resources it needs for a rapidly shifting legal and regulatory environment. MasterCard is currently controlled by 1,400 banks and credit unions which issue its debit and credit cards. The offering is expected around the first quarter of 2006, and will allow those banks to retain a 41% equity interest through ownership of Class B common stock. “We will retain $650 million of the IPO proceeds to fund a capital increase, the economic impact of which will be borne by our U.S. shareholders,” wrote Chairman Baldomero Falcones and President and CEO Robert W. Selander in a letter to issuers. “Along with the proposed structural changes, we believe these resources will place us in position to defend our interests in the legal and regulatory arena.” A proxy statement will be sent to issuers later this week, MasterCard said, and the card brand declined to take any further questions on the offering, citing the Security and Exchange Commission’s regulations requiring a “quiet period” in advance of an IPO. The stock offering will give investors 83% voting rights in the publicly traded company, the brand said, but current shareholders will also be given class M stock which will carry no economic rights but will give them certain rights in regards to decisions such as mergers. Additional shares of Class A common stock, representing an estimated 10% of the company’s equity and the remainder of its voting rights, will be issued to a new MasterCard charitable foundation. MasterCard said it plans to use part of the IPO net proceeds to redeem Class B common shares from its financial institution shareholders. The new corporate governance and ownership structure is subject to shareholder approval, regulatory filings, and various contingencies. As a sign of the shift, MasterCard will be governed by an independent board of directors and not by a board made up of issuers. Reactions to the news have been scarce across the industry. PSCU Financial Services spokesman Merry Pateuk said that the cooperative, which processes card transactions for over 500 credit unions which use the First Data card platform, hasn’t had a chance to analyze the proposal yet. But she added that under its current structure, MasterCard seeks to benefit the system as a whole, both issuers and retailers. “Now there is going to be a new category of interests in the mix called stockholders or investors,” Pateuk said. “Only time will tell how that is going to play out.” Visa, MasterCard’s chief opponent in the market, expressed surprise at the move. “MasterCard’s announcement comes as little surprise given its recent series of financial disclosures, and it is yet another example of the dynamic nature of the payments landscape,” said Paul Cohen, CEO of Visa. “Visa is well positioned to compete with MasterCard regardless of its ownership structure. Visa’s focus has been, and continues to be, growing our network, investing in new technology and products, and maximizing the long-term value we deliver to all participants in the Visa payment system, working in close cooperation with our Members. “Naturally, like any company in a rapidly evolving business environment, Visa’s management team and board of directors continually assess how best to structure our organization so that we can optimize value to all stakeholders.” -