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Research in Motion (Nasdaq: RIMM), an Ontario, Canada based technology company that has become famous for its Blackberry wireless email device, had petitioned the U.S. Supreme Court to hear its case that argued that the Canadian concern was not required to abide by U.S. patent law because the company and its data centers are based outside of the country.  Roughly 70% of the company's revenues from its three million subscribers come from the U.S.   [edit --tex]

Shares are trading at $65, well below the 52-week high of $84.

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ijay Balkissoon, Staff Writer, Big Idea Investor 


Whenever a highly profitable business with one of world's best known brand names goes public, the investing public should rightly take notice.  Traders salivate over the inevitable first day pop that comes with such an IPO, while investors in it for the long haul look forward to the start of what they hope will be a long and profitable relationship.   


The early speculation on Wall Street is that MasterCard International's IPO, set to occur sometime in Q1 2006, will be a blockbuster, easily dwarfing Google's $1.2 billion IPO in 2004; analyst estimates for the amount MasterCard stands to raise range from $2.65 billion to a lofty $7 billion. MasterCard just might richly reward those who can snag shares at IPO levels, but is this a company that is worth sticking it out with for the long haul?  


Plenty of "pro's" abound when examining MasterCard's business and its future. Forgive me for pointing out the obvious, but credit and debit cards are fast becoming the world's preferred method of payment.  According to MasterCard's registration statement on file with the SEC, the dollar amount of all credit, charge, and debit transactions (online and offline) processed worldwide in 2004 was $7.5 trillion, an increase of 13% over 2003.  MasterCard itself accounted for $1.5 trillion of these transactions in 2004, which amounts to about 20% of transaction volume. [my emphasis --tex]   For MasterCard and its main rival Visa, as well as secondary competitors American Express and Discover, the biggest long-term opportunities for future growth exist in China and India, since the world's two most populous nations remain largely cash-based economies.  As these nations and other emerging nations become more familiar with the use and ease of plastic payment, MasterCard is positioned to reap the benefits. 


One reason to consider owning MasterCard is the company's global brand and the massive international opportunities.  MasterCard has been carefully building their brand and expanding their reach since they first came into existence in 1966 and was an early pioneer in the credit card business.  Among the "firsts" that MasterCard takes credit for are becoming the first payment card accepted in China in 1987, unveiling a co-branding strategy in 1990, and completing the first coast-to-coast national online debit transaction in the United States in 1992. In recent years, with its series of well received "priceless" commercials, Mastercard has gone a long way towards extending its brand awareness.  But having a great brand means very little if you don't have a great business to go along with it.  This is no concern for MasterCard. 


MasterCard, like its rivals in the plastic game, gets a slice of every single transaction that is processed through its global payment network.  In 2004, MasterCard's payment network processed a staggering 12.2 billion transactions.  The company netted $238 million on revenues of $2.6 billion (+16.3% from 2003), for a healthy net profit margin of 9.2%.   A look at MasterCard's pre-IPO balance sheet shows that the company has approximately $530 million in cash and cash equivalents with $229 million in debt. Why does a company with that kind of cash on hand need to go public?  


Like most companies going public, MasterCard will use the money raised from an IPO for all the usual suspects: to grow its business through acquisitions, invest in new technology, and launch new marketing initiatives.  However, there are strong indications are that the move by MasterCard to go public is primarily a defensive one that stems from the company's worries over litigation.   


Simply put, MasterCard is grappling with dozens of lawsuits over issues such as processing fees and security breaches that could cost the company millions in legal fees and potentially billions in damages.  By taking the company public, MasterCard is essentially asking investors to help foot the potential bill for its legal woes.  In its registration statement, the company admitted as such, noting that it has earmarked up to $650 million of funds raised in its IPO for, among other things, present and future legal expenses. 

MasterCard is of the opinion that many of their legal woes come from their corporate governance structure which strongly resembles that of a cartel.  As a public company, MasterCard will appoint independent directors that will replace its directors that are currently culled from its 1,400 member banks.  After the IPO, 49% of MasterCard will be owned by the public, and 41% by member banks. Although investors will retain 83% of voting rights with their class A shares, member banks with their class M shares will have the right to select up to three directors and also will maintain the right to approve "significant corporate transactions." Beyond investors and member banks, 10% of MasterCard International stock will be owned by a charitable foundation newly established by MasterCard.   


MasterCard says that The MasterCard Foundation, a charitable foundation to be incorporated in Canada, will benefit disadvantaged children and entrepreneurs - through microfinance programs - throughout the world.  Over the next four years, MasterCard will donate $40 million to the charity.  That cash outlay combined with the issue of stock will force the company to record a significant net loss for the first quarter and full year of 2006 according to the company's SEC filings.  Even more concerning, The MasterCard Foundation doesn’t seem very eager to do charitable work.  According to filings, the company has asked Canadian authorities for a reprise from the country's charitable foundation laws.  Canadian law requires that charities distribute 3.5% of their assets annually.  MasterCard has asked for this requirement to be delayed for up to 10 years but insists that the foundation will make charitable disbursements as soon as "reasonably practicable."   


Add it all up and what do we have? MasterCard might have a great brand and a profitable business, but in the end they are asking investors to subsidize their legal fees and will not be utilizing the brunt of shareholder equity to expand their business and in turn return value back to shareholders.  While I don't for a minute doubt the good intentions of the MasterCard Foundation, the establishment of the foundation strikes me as a ploy for member banks to retain tight control over MasterCard International.  Not to mention that $650 million might not be enough to wash away the company's legal problems.  In the post-dot com IPO era, where IPOs are thankfully being considered more carefully, I think it's fair to say that if MasterCard was an obscure company with similar IPO terms and plans for the cash they raised they might just be laughed right out of the investment bank. 

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XTO is payin $2.38 per share for holders of record as of April 26th, 2006...

cowtownkid

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