MasterCard Confusion

About a month ago, MasterCard announced that it would be doing an IPO sometime in early 2006. Currently MasterCard is controlled by a consortium of banks that issue MasterCards. MasterCard has filed public financial statements for the past two years, seems to have a stable and growing business, and a dominant brand name.

Long story short, MasterCard looked like the first IPO I might be interested in buying a little of. I had put off serious investigation since the IPO date is still a long way off. That was until last Thursday, when my Financial Advisor at UBS sent me this:

MasterCard Outlines IPO, Sees 1Q Loss

MasterCard Inc. disclosed that it wants to raise as much as

$2.45 billion in its initial public offering early next year, and

said it expects to report a first-quarter 2006 net loss - and possibly

even a full fiscal 2006 loss - as a result of the offering.

The Purchase, N.Y., credit-card payment processor filed its

first document with the Securities and Exchange Commission

outlining the basics of its 61.5 million offering of Class A

stock. The company, which hired Goldman Sachs Group Inc. to

manage the offering, intends to list its shares on the New York

Stock Exchange under the symbol “MA”, it said.

Goldman Sachs hasn’t set the price range that it expects the

stock to fetch in the public market, and the actual amount that

it ultimately raises could vary from the $2.45 billion it lists in it

initial filing.

(Dow Jones)

I was surprised to see MasterCard anticipating a possible full year 2006 loss. I was attracted to MasterCard because I thought revenue and net income would be pretty stable. MasterCard gets a portion of the fees issuing banks charge other banks who process MasterCard transactions on behalf of merchants. These fees are primarily based on the number of transactions consumers process on MasterCards, and the total dollar volume of those transactions. Growth in the number of transactions and volume has been strong, and there is still plenty of room for international growth.

But when I gave MA's financials a cursory overview I was surprised at what I saw:

Mastercard's projected losses, coupled with their losses in 2003 kind of threw up a red flag. The revenue growth is steady and robust, but the net income number jumps around by hundreds of millions of dollars.

I have a strong feeling that this is the result of the banks that currently own MasterCard dumping promotional expenses on MasterCard, making the banks' income statements look a little better at the expense of MA.

One of the things my gut tells me about this deal is that when it is done, new doors will open for MasterCard. No longer under the threat of anti-trust litigation, no longer beholdent to these banks, I think this IPO may have cause significant changes to MasterCard's core operations.

My second half of the week project is to figure out what is really going on at MasterCard. If anyone eles in investigating this deal, I would love to team up to get a good understanding of MA's business, and a good guess regarding what that business may look like when MA is a publicly traded company, no longer controlled by these banks.

I will update after I spend some serious time with MasterCard's financials.

Timothy Burger
timothyb(at)timothyburger.com