Industry watchers are puzzled by MasterCard’s unusual 18% voting rights allocation to a charitable foundation. Wendy Atkins reports.

MasterCard’s gigantic initial public offering (IPO), expected to raise $2.45bn, could significantly change the stakes for payment card companies. With non-banking organisations wanting a piece of the payments action, the IPO, expected to take place this month, could have implications beyond the banking industry.

The IPO on the New York Stock Exchange sees the appointment of a new board of directors composed of a majority of independent directors. MasterCard shareholders will also give up 59% of the company with 49% of this being floated and 10% going to a charitable foundation, which will be given 18% of the voting rights.

The establishment of the foundation has raised a few eyebrows and had industry watchers expressing surprise. MasterCard is unable to comment about the IPO because it is in its quiet period, so it has been left to industry experts to speculate on the reasons behind the move.

Reena Aggarwal, professor of finance at Georgetown University, calls it “intriguing”. “This is a large number and is not a common approach taken by other companies going down the IPO route,” she adds.

Dan Schatt, senior analyst at research and consulting firm Celent, believes there are dual motives for setting up the charitable foundation. “By giving 10% equity and 18% voting rights to the foundation, it will dilute the shareholding of anyone buying into the company… as a long-term strategy, this should preserve MasterCard because all decisions will be made for the long-term preservation of MasterCard.

“Of course, cynics might argue that existing shareholders are just trying to retain power and don’t want to be taken over by Wal-Mart. The reality is that there is some truth in both explanations.”

The wider decision to take the IPO route has been welcomed by some insiders. “With the changes introduced by the IPO, MasterCard will not only be subject to the demands for financial performance in a way that is not currently the case but, by virtue of the regulatory requirements around public companies, it will also be subject to demands for information to which American Express and most of our peers already are,” comments Robert Glick, spokesperson for American Express.

Fit for the future

The IPO is seen as a way of addressing some of the problems faced by both MasterCard and Visa. By removing voting rights and changing corporate structures, it could reduce MasterCard members’ liability to lawsuits. “There is so much tension and angst among merchants towards MasterCard and Visa, so both companies have to do a lot to ensure they are around in the future,” says Mr Schatt. “The IPO enables MasterCard to reduce the tension by bringing retailers and other stakeholders to the same table as the banks.”

The introduction of non-bank players could potentially create organisations that are more relevant. After all, the traditional payments industry is facing growing pressure from organisations such as PayPal and First Data. But it does not stop there: mobile phone operators have been establishing initiatives to facilitate payments, and in the US, large supermarket chains have made moves towards establishing their own payments schemes and have also converted loyalty cards to payment mechanisms.

“By bringing these organisations back into the fold, it should reduce their interest in establishing mechanisms that circumvent the big associations,” says Schatt.

Visa is also looking at how it can meet the needs of the 21st century. It recently decided to have independent directors on all boards, including the Visa International board, and also incorporated its European operation. Some analysts believe it too could take the IPO route in the coming months.

However, Simon Barker, director, global corporate relations, at Visa, says: “Last year we began an ongoing process to look at a range of issues including what is the best future model for Visa... Lots of different options are under consideration and nothing is being taken off the table. We have viable business units in a lot of different regions and don’t have to take the centralised route that MasterCard has done. Whatever changes, if any, are made in the coming months, strong local operations will remain the backbone of Visa.

“We think it is very important to add independent views and expertise to our boards in order to provide them with the broadest possible perspective. We expect to have independent directors in place this year and have an executive recruiting firm actively searching for strong candidates… The move to independent directors is also part of our commitment to good governance standards.”

Some analysts believe MasterCard’s IPO could put more pressure on players such as American Express, which are seen as independent from an association corporate structure. “This could take away the inherent advantage American Express has in terms of litigation issues and may make merchants more open to working with Visa and MasterCard again,” says Mr Schatt. “It could prompt them to look at non-bank initiatives and programmes such as co-branded mobile cards.”

However, American Express’ Mr Glick says: “We do not believe, as some analysts had initially suggested, that the change in ownership structure of MasterCard will have any harmful impact on our business model, nor will it enhance their ability to replicate our ‘closed loop’ structure.”

With everything to play for over the coming months, MasterCard’s IPO could potentially be just the start of a big movement to shake up the payments cards industry.

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