Visa picked a tough time to swipe its former European partner for $23 billion. The U.S. payments network is using an earnout, buybacks and other financial maneuvers to soften the blow of paying 61 times last year’s pre-tax earnings for its overseas cousin. The lengthy integration, however, is arriving just as industry competition heats up.
Boss Charlie Scharf reckons Visa won’t fully digest its new acquisition until 2020. That’s a long time for any takeover, but even more so for two companies that until almost a decade ago were one.
It’s not just a matter of meshing together clearing and processing systems. Visa Europe is a mutual enterprise owned by 3,000 banks and payments companies. Becoming part of a publicly traded operation can be messy and unsettling. MasterCard, for example, lost a number of employees, including to Visa Europe, when it demutualized in 2006. Scharf also has to keep the banks onside once they’re no longer in control.
The takeover is at least structured to give current owners a vested interest to play nice. Visa is paying for a 5 billion-euro portion of the deal with preferred stock that can only later be converted into common shares. The preferred securities also provide Visa with some protection against any UK interchange-fee litigation. Another 4.7 billion euros of the headline price will only be paid four years after the deal closes, if revenue targets are hit.
In addition, Visa is trying to keep its own owners happy by pledging to buy back enough common shares to offset the dilution from issuing preferred stock. The takeover price is based on a formula devised back when they split that puts Visa’s forward earnings multiple on whatever the two decide is Visa Europe’s sustainable net income, including cost cuts, the year after a merger. That factors in enough moving parts to leave the buyer’s shareholders waiting a while to verify whether Scharf and his team deserve the trust they’re asking for.
Meanwhile, new technology in payments is starting to cause upheaval. Visa for now sits in a decent position. As management puts its focus squarely on making a big merger work, however, well-funded upstarts are bound to try to capitalize on any distraction.