Private-equity firm Kohlberg Kravis Roberts & Co. plans to go public by year-end as part of its plan to bail out the company’s struggling Euronext-listed investment fund.

KKR Private Equity Investors (PINK: KPEQF), which has lost 40% of its value year-to-date and is currently listed on Euronext Amsterdam, will be dissolved as part of the deal, Kohlberg Kravis Roberts & Co. announced via a press release posted on its website. Current shareholders of the investment fund will receive shares of the newly formed entity, KKR & Co. LP (KKR), which will be listed on the New York Stock Exchange.

KKR made a name for itself as a leveraged-buyout (LBO) pioneer with its $30 billion takeover of RJR Nabisco Inc. in 1989. The firm first filed for an initial public offering in July 2007, but with the LBO market gutted by the freeze in the credit markets KKR’s IPO plans got put on hold.

KKR relied on LBOs for 95% of its profit in 2007, Bloomberg News reported. As the credit crisis unfolded and easy credit all but disappeared, new LBO deals plunged 70% to $163.1 billion this year through July 25 from the same period in 2007, according to data compiled by Bloomberg. That has left KKR in a very vulnerable position.

"The timing of the IPO suggests that KKR is not expecting a significant recovery in the buyout market any time soon," Isabel Schauerte, an analyst with Celent, a Boston-based financial research and consulting firm, told Reuters.

"Otherwise, the company would have been willing to wait until the market picks up in order to get a better valuation."

KKR co-founder George Roberts insists now is the perfect time for the deal, despite the current lull in the LBO market.

"Today, many institutional investors are turning to alternate investments to balance their portfolio," Roberts said yesterday (Monday) on an investor’s conference call. "A leading alternative manager like KKR is poised to benefit from these trends."

In a unique twist to a traditional IPO, KKR will not be offering shares to the public. Instead, current shareholders of KKR Private Equity Investors will receive 21% of the newly formed entity, while 16% will be saved for future employee stock options. Current KKR executives and employees will hold the remainder of the shares.

"We’re not cashing out or selling any equity as part of this transaction," co-founder Henry Kravis said on yesterday’s conference call. "This is different from any other alternative-asset IPOs. We’re long-term investors."

News and Related Story Links:

• Bloomberg News:
  KKR Seeks to Catch Blackstone by Going Public, Adding New Funds

• MarketWatch:
  KKR set to go public in merger with affiliate

• Reuters:
  KKR says market slump good time for going public

• The Wall Street Journal:
  A Short History of KKR and the Public Markets

Visa Inc. (V) shares soared nearly 30% after the company’s record U.S. stock offering yesterday (Wednesday), as investors bet that its dominant market position and the growing shift into electronic payments will translate into consistently escalating profits for the operator of the world’s biggest electronic payments network.

After its 406 million shares were priced at $44 each – well above the expected price range of $37 to $42 a share – the Visa initial public offering (IPO) raised a record $17.86 billion. If an over-allotment provision of 40.6 million shares is utilized, the offering will raise an additional  $1.79 billion – bringing the total proceeds to $19.65 billion.

Not only would that easily leapfrog the largest U.S. IPO to date – the $10.6 billion stock offering for AT&T Wireless, which occurred in April 2000 – it would actually place the Visa deal up close to the biggest global IPO of all time: The October 2006 IPO of the Industrial & Commercial Bank of China, or ICBC, which raised $19.1 billion – or nearly $22 billion when the over-allotment provisions were fulfilled.

Story Continues Below…

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Visa’s shares opened at $59.50 on the New York Stock Exchange (NYX), and traded as high as $65, before closing yesterday at $56.50, up $12.50 a share, or 28.41%. The run-up gives the San Francisco-based company a market value of nearly $50 billion.

But the long-term value is probably much higher, says IPO expert Louis Basenese.

"I think fair value rests near $80 in the intermediate term. Morningstar thinks $74 is the magic number," says Basenese, editor of The Hot IPO Alert and The Takeover Trader investment newsletters. "Either way, the current price means the stock’s undervalued and represents a solid double-digit opportunity, a rarity in this volatile market."

A Unique Allure

It’s Visa’s unique position that makes it such an alluring investment, Basenese says. In fact, the Visa deal is one of the better IPOs to come down the pike in some time. For one thing, the company is the market leader, dwarfing its rivals in terms of both transaction volume and total transactions [See accompanying chart], he says.

Chart 1: Visa the Giant

As the largest processor of retail payments the world, Visa Inc. dwarfs its rivals. It accounts for 60% of the debit-card transactions in the U.S. market – a four-to-one advantage over rival MasterCard. As the chart demonstrates, it is also bigger by total transactions and total volume.

Sources: The Hot IPO Trader, Money Morning.

Visa is an electronic payments network that focuses on retail transactions. It actually acts as a facilitator of global commerce, enabling money and information to move among banks, retailers, consumers, businesses and even government entities.

There are three basic points investors need to understand – especially with the chaotic credit markets investors now face, Basenese says:

• Visa is not a credit-card issuer.
• It’s not a lender.
• And it’s not exposed to consumer-credit risk.

The bottom line: Visa is simply a transaction-processing company that collects a fee based on the number and dollar value of the transactions that it processes, he said. In short, this is a financial-services company whose shares investors can snap up with confidence and a feeling of safety, since there aren’t any worries that another credit-crunch-related catastrophe could obliterate its business and send its shares into the ground.

"Visa enjoys one of the widest economic moats that a company can desire," Morningstar analyst Michael Kon wrote in a Wednesday research note.

A Changing World

Investors have been eager to grab shares in Visa’s offering as shares of the much-smaller rival MasterCard Inc. (MA) have more than quadrupled in value since the company went public in May 2006. MasterCard shares have largely been untouched by the stock-market turmoil generated by the ongoing credit crisis and closed yesterday (Wednesday) at $206.39, down $1.86, or 0.88%. They are down 8% from their 12-month high of $227.18.

The fervor reflects investors’ view that Visa is in a lucrative position as consumers and businesses alike rely increasingly on its electronic network to make payments instead of using cash and checks. Visa is expected to milk the phenomenon to become an even bigger cash cow than it already is.

Visa generated $5.2 billion in revenue last year as it handled more than 44 billion transactions totaling more than $3.2 trillion. The volume puts Visa far ahead of its main rival MasterCard, whose own shares have more than quintupled from their May 2006 IPO price of $39, according to a Forbes.com report.

Making Visa even more alluring to investors: The firm is very well insulated from the credit issues that have scorched the very banks that issue Visa-brand credit cards. The banks – not Visa – carry the consumer debt on their books. Visa generates revenue and profit from transaction fees, which have been advancing steadily for years. In fact, those fees even increased during the last two U.S. downturns – 1991 and 2001.

Indeed, since the last recession, Visa has been able to get consumers to increasingly use its debit and credit cards for the purchase of such staples as gasoline and groceries, and to cover such household budgetary costs as utility bills. The upshot: Visa estimates that about 42% of its transactions fall into the "nondiscretionary" category, way up from the 27% recorded for 2000.

"We operate in a large global market undergoing a significant shift from cash and check to electronic payments, said Visa Chairman and Chief Executive Officer Joseph W. Saunders. "We believe Visa is well positioned to build upon our past success and take advantage of this migration to electronic payments."

Reflecting management’s confidence, Visa anticipates annual earnings growth of at least 20% for each of the next two years – and possibly longer. The company got off to a fast start in the fiscal first quarter that ended in December, reporting a profit of $424 million profit, up 70% from the comparable quarter the year before.

Investment bankers could still exercise an option to buy another 40.6 million Visa shares during the next 30 days. If that happens, Visa’s IPO will end up raising $19.7 billion before expenses.

"To sell 400 million shares at a time like this is Herculean," David Menlow, president of IPOfinancial.com, told The Associated Press.

About $10 billion of the IPO proceeds have been earmarked to buy back shares from the banks that helped build up its network over the past 50 years. The biggest chunk – about  $1.25 billion – will be paid to its largest customer and shareholder, JPMorgan Chase & Co. (JPM).

For banks, this payoff couldn’t come at a better time. Worldwide, financial institutions have recorded losses and taken write-downs totaling nearly $200 billion as a result of the worst global financial crisis since the Great Depression.

According to filings related to the stock offering, another $3 billion from the IPO is being deposited into an escrow account to cover potential liabilities in lawsuits that have been alleging that Visa conspired to fix prices and stifle competitors’ efforts. Analysts say that those legal issues are one of the few clouds hanging over Visa’s stock, although the company’s leaders contend that the escrow account and other contingency measures should protect investors.

Visa paid more than $2 billion late last year to resolve a suit with American Express Co. (AXP), but a similar case brought by Discover Financial Services LLC (DFS) is set to go to trial in New York on Sept. 9.

Visa listed JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), Banc of America Corp. (BAC), Citigroup Inc. (C), HSBC Securities (HBC), Merrill Lynch, Pierce, Fenner & Smith Inc. (MER), UBS AG (UBS), and Wachovia Corp (WB) as joint book-running managers of the record U.S. stock offering.

[Editor's Note: Louis Basenese is the editor of The Hot IPO Alert and The Takeover Trader newsletters, and is a contributing writer to Money Morning. Basenese last wrote about how to profit from the takeover market. To learn more about The Oxford Club and its publications, please click here. Check out Money Morning's full investment research report on Visa's IPO].

News and Related Story Notes:

• Bloomberg News:
  Visa Rises After Record $17.9 Billion U.S. Offering.

• Money Morning Special Investment Report:
  Visa’s Record IPO is Shaping Up as One of the Hottest Stock Offerings in Years.

• Money Morning Special Investment Report:
  Visa’s Record IPO Shaping Up as a Profitable Play for Long-Term Investors.

• Thomson Financial News:
  Daily IPO Wrap-Up.

• PRNewswire:
  Statement From Joseph W. Saunders, Chairman and CEO, Visa Inc. Regarding Visa Shares Trading on the New York Stock Exchange.

• Forbes.com:
  Visa Stock Soars in Market Debut.

The Visa Inc. (V) initial public stock offering is already going to be the biggest IPO in U.S. history.

Now it’s also poised to be the hottest IPO investors have seen in years.

Late yesterday (Tuesday), just hours before the massive credit-card processor are scheduled to start trading today (Wednesday), industry experts say that strong demand induced underwriters to price the stock at $44 a share.

That’s $2 a share higher than the even the very top of the projected range of $37 to $42 a share. And it means the offering raised a U.S. record $17.86 billion – even without the over-allotment provision of 40 million shares that would boost the proceeds by $1.76 billion.

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IPO expert Louis Basenese says that some experts are suggesting that investors employ the indirect approach by purchasing shares of the downtrodden banks that are underwriting the deal.

And while it’s true that those banks will control a hefty chunk of Visa stock after the offering is finished, this strategy is still a bad idea, according to Basenese. Agreements will keep the banks from converting their "Class B" shares to "Class A" shares for years. And that lockup period could actually be lengthened by any pre-IPO litigation that the agreement says must be settled before the shares can be converted so investors who played this hand can profit.

“Stay with the ‘Class A’ shares,” says Basenese, an IPO expert who is the editor of the investment newsletters The Hot IPO Alert and The Takeover Trader.

Details of the Deal

The San Francisco-based Visa originally filed to sell 406 million “Class A” common shares at $37 to $42 apiece, for proceeds of $15 billion to $17 billion. Even that would have easily leapfrogged the largest U.S. IPO to date: The $10.6 billion stock offering for AT&T Wireless, which occurred in April 2000.

By boosting the price to $44, the over-allotment provision would boost the total proceeds to $19.62 billion. That would actually push the Visa deal up near the biggest global IPO of all time, the October 2006 IPO of the Industrial & Commercial Bank of China, or ICBC, which raised $19.1 billion – or nearly $22 billion when the over-allotment provisions were fulfilled.

If the Visa deal is oversubscribed, the fallout could be highly bullish. Currently, the stock offering is supposed to be priced today (Tuesday) so the shares can begin trading tomorrow (Wednesday).

“If the Visa IPO does as well as everyone expects, comes out on schedule and is oversubscribed as I believe it will be, it could have a huge impact on the stock market in general and the IPO market specifically,” Basenese said.

Basenese says that, according to his calculations, Visa’s shares could be worth $80 by the end of this year – and perhaps more, if all goes according to plan.

It could even revitalize the U.S. IPO market, which has been enduring one of its toughest stretches in years.

Ending the “Manic” Market for IPOs

At a time when U.S. investors are losing confidence in stocks, a rejuvenated IPO market could play a key role in rejuvenating the major indices.

A year ago, when stocks were soaring to new record highs, private-equity deals, leveraged buyouts and big corporate mergers were helping fuel a lot of the advance. Investors were willing to pay up for stocks, reasoning that they had a good chance of bailing out with a handsome windfall if their company was “taken out” by a hedge fund or a buyout artist.

But hedge funds, private-equity players and even corporations looking to get leaner and meaner are only aggressive about these deals themselves when there’s an easy way to “cash out.” And that “cash-out” strategy means there has to be a healthy IPO market. A private equity fund buys a company that’s stumbling a bit, but still has a good business, taking it private. They invest some capital, and devote some management attention to the firm. Two years later, they sell the revitalized company to investors via an IPO that sends the company’s stock rocketing skyward on its first day of trading as a newly public company.

And everybody’s happy.

When the IPO market stalls, however, those buyout deals slow to a trickle, and the market’s former record advances come to an end.

“Weakness in the overall stock market translates into the IPO market," Jay Ritter, professor of finance at University of Florida, told Reuters in an interview. “The IPO market tends to be hypersensitive to movements in the broader market … and this hypersensitivity tends to make the IPO market somewhat manic depressive.”

With the Standard & Poor’s 500 Index down more than 11% so far this year, underwriters remain wary of bringing new stock deals to the market. In January and February alone, 30 U.S. IPOs were withdrawn or postponed, reports IPO data provider Dealogic. Globally, during that same two-month stretch, more than twice than many IPO deals were shoved onto the back burner.

The spiraling global credit crisis has only made matters worse. In January and February, IPO hopefuls around the world shelved stock worth $21.4 billion, which was almost twice the value of the new

shares that actually were issued, according to data from Thomson Financial.

Globally, 92 IPO issuers raised just $12.2 billion in the year’s first two months – the worst start to the year since 2003.

And the role of the United States in the IPO market continues to slip, as the biggest deals getting done continue to come from other markets abroad. Of all the IPOs issued globally in January and February, only 7% emanated from U.S. companies, down from last year’s still-lackluster 33%.

“We are off to our worst start for IPOs in the United States since 2003," Richard Peterson, director of capital markets at Thomson Financial, told Reuters. "There have only been nine deals priced so far this year and there hasn’t been a deal priced in the past two weeks.”

According to the Securities and Exchange Commission Form S-1 filings, there are 186 companies that have already filed to go public and that are now waiting on the sideline, including 58 that have filed this year, said Basenese, the IPO newsletter editor.

The Visa deal could help break up the logjam. Indeed, the fact that it’s been moved up is highly positive and means the deal is probably a good one for investors, he said. His reasoning: In all his years covering the IPO market, he’s yet to see the underwriters move up a poor IPO deal.

Not everyone believes this will help the U.S. IPO market.

David Menlow, president of IPOfinancial.com, told AFX News that “we have an IPO market anomaly with Visa. This is a singular seismic event that is not going to re-ignite the market as far as instill confidence or bring more deals into the system.”

Francis Gaskins, president of IPODesktop.com, agreed, stating that this IPO is “a unique, one-time event. All eyes will be on Visa and then it’s over.”

But even if that’s the case – and the IPO doesn’t re-ignite the U.S. stock-offering market – Visa’s shares can still be a profitable play for investors.

Here’s why.

The Keys to the Deal

According to Basenese, the Visa deal is one of the better IPOs to come down the pike in some time. For one thing, the company is the market leader, dwarfing its rivals in terms of both transaction volume and total transactions [See accompanying chart].

Chart 1: Visa the Giant

As the largest processor of retail payments the world, Visa Inc. dwarfs its rivals. It accounts for 60% of the debit-card transactions in the U.S. market – a four-to-one advantage over rival MasterCard. As the chart demonstrates, it is also bigger by total transactions and total volume.

Sources: The Hot IPO Trader, Money Morning.

Visa is an electronic payments network that focuses on retail transactions. It actually acts as a facilitator of global commerce, enabling money and information to move among banks, retailers, consumers, businesses and even government entities.

There are three basic points investors need to understand – especially with the chaotic credit markets investors now face, Basenese says:

• Visa is not a credit-card issuer.
• It’s not a lender.
• And it’s not exposed to consumer-credit risk.

The bottom line: Visa is simply a transaction-processing company that collects a fee based on the number and dollar value of the transactions that it processes, he said. In short, this is a financial-services company whose shares investors can snap up with confidence and a feeling of safety, since there aren’t any worries that another credit-crunch-related catastrophe could obliterate its business and send its shares into the ground overnight, Basenese said.

Investors have been eager to grab shares in Visa’s offering as shares of the much-smaller rival MasterCard Inc. (MA) have more than quadrupled in value since the company went public in May 2006. MasterCard shares have largely been untouched by the stock-market turmoil generated by the ongoing credit crisis and closed yesterday (Monday) at $201.52, down $7.13, or 3.42%. They are down 11% from their 12-month high of $227.18.

A Profitable Profile

With a public company, at the end of the day, it’s always about earnings. And Visa is poised to deliver profit growth. In its latest quarterly report, Visa generated $1.49 billion in revenue and $430 million in profits [excluding one-time events]. Company managers are conservatively projecting that profits will advance at a 20% clip.

But with his own analysis, Basenese uncovered three catalysts that will help Visa boost its profit-growth rate up to the 30% to 35% pace. Those three key catalysts:

• No Chinks in its Armor: To generate profits, a company has to have strong sources of revenue. And Visa does. In fact, Basenese says there’s “not a weak spot in this company’s revenue mix.” Sales are increasing at healthy, double-digit rates across all business segments and in all geographic markets.
• Killer Cost Controls: Since 2003, the total number of transactions Visa processes have soared 61%, but costs have increased only 12%. And since the company’s VisaNet payment-processing network is capable of handling double its current volume without really increasing its costs, incremental additions to revenue will translate into “dramatic increases” in earnings, Basenese says.
• A Less-Taxing Tax Rate: Before the stock offering, Visa didn’t really have to fret about its tax rate, since it wasn’t a public company that had to engage in the quarterly cow-towing to Wall Street. As a result, it’s one of the few companies with a horrid tax rate of 41%. Even archrival MasterCard boasts a tax rate of only 35%. But now that it’s a public company, Visa will pull out all the stops in its efforts to pare its tax rate. If it gets down to MasterCard’s level, a 6% reduction in the tax rate on hundreds of millions of dollars in income will have a big impact on the bottom line, Basenese says.

Going Global For Growth

The global payments sector is undergoing a true paradigm shift – away from cash and checks in favor of one that’s card-based and highly focused on electronic transactions. Since 2001, transactions using credit and debt cards went from 13% of payment volume to 27%, a compound annual growth rate of nearly 15%.

As dramatic as that metric is, it’s important to note that Visa grew at double that rate during the same period.

Expect the trend to continue – and to expand globally.

According to The Nilson Report, a newsletter that focuses on the payments industry, the purchasing card market will expand at an annual rate of at least 11% on a global basis between now and 2012. And much of the growth will be generated internationally – especially in the emerging markets.

Once again, Basenese says that his analysis has found that Visa is poised to grow faster than the market, which means that it’s going to grab market share from rivals.

First, two-thirds of Visa’s debit cards are in foreign hands, where consumer-spending levels are on the rise and where the use of electronic-payment technologies is still in its infancy.

And, second, research shows that six out of 10 consumers prefer Visa cards. That kind of brand loyalty means that Visa will be able to introduce new products with very little resistance. Visa already plans to introduce those products in four key areas: Prepaid cards, money-transfer technologies, e-commerce and mobile-transaction-processing.

At a time when U.S. consumer confidence is ebbing quickly and when fears of a major potential recession are escalating, investors need to note that Visa’s business is increasingly becoming almost recession proof. Here’s why:

• Research underscores that 42% of Visa’s revenue is derived from non-discretionary spending, meaning that a lot of that revenue won’t disappear even if consumers and businesses make major cutbacks in their outlays for luxuries or other non-essential goods and services.
• During the last two recessions, Visa continued to grow – both in terms of total transactions and total volume. And in each of the last 13 months – as a recession becomes more and more likely – Visa’s business has continued to grow at double-digit rates.

The Right Play at the Right Time

According to Basenese, Visa’s shares could be worth $80 by the end of this year – and perhaps more, if all goes according to plan. The stock actually will pay a small dividend – about 1%, based on the projected IPO price. That’s a rarity among newly public companies. But Money Morning Investment Director Keith Fitz-Gerald puts a premium on stocks that generate income.

Basenese likes the company, its business plan, its market position, and its financial strength.

“The pitch for Visa is simple,” he said. “It’s a rare opportunity to own a piece of a relative monopoly.”
[Editor’s Note: Louis Basenese is the editor of The Hot IPO Alert and The Takeover Trader newsletters, and is a contributing writer to Money Morning. Basenese last wrote about how to profit from the takeover market. To learn more about The Oxford Club and its publications, please click here.]
News and Related Story Links:

• Reuters: Market turmoil will not stop Visa IPO: analysts.
• Wikipedia: Form S-1.
• Money Morning: With a Charge Into Visa IPO, Kuwait Would Become Latest Sovereign Fund to Boost its U.S. Financial Sector Role.
• Seeking Alpha: Industrial & Commercial Bank of China Sets New IPO Record at $19.1 Billion.
• CNNMoney.com: Visa Moves IPO Pricing To Tuesday From Wed –Goldman.
• Reuters: Report: IPO View: Visa IPO a ray of hope for frozen U.S. IPO market.
• Money Morning Economic Forecast Series: Outlook 2008: Three Ways to Profit From A Takeover Market That’s Alive and Well.
• AFX News Ltd: IPO Spotlight: Visa seen as IPO anomaly.
• MarketWatch.com: Visa set for strong debut in biggest U.S. IPO.
• MarketWatch.com: Visa raises about $17.86 billion in record IPO.

If the initial public offering of credit-card processor Visa Inc. (V) goes off as scheduled tomorrow (Wednesday), it will be the biggest stock offering in U.S. history. And it could supercharge a moribund IPO market that’s been held down by the same credit-market concerns that have repeatedly threatened to send the key U.S. stock indices spinning down into bear-market territory.

The San Francisco-based Visa has filed to sell 406 million “Class A” common shares at $37 to $42 apiece, for proceeds of $15 billion to $17 billion. That would easily leapfrog the largest U.S. IPO to date, the $10.6 billion stock offering for AT&T Wireless, which occurred in April 2000.

If demand is strong, an additional 40 million shares could sell, generating a much as $19 billion in proceeds. That would actually push the Visa deal up near the biggest global IPO of all time, the October 2006 IPO of the Industrial & Commercial Bank of China, or ICBC, which raised $19.1 billion – or nearly $22 billion when the over-allotment provisions were fulfilled.

If the Visa deal is oversubscribed, the fallout could be highly bullish. Currently, the stock offering is supposed to be priced today (Tuesday) so the shares can begin trading tomorrow (Wednesday).

“If the Visa IPO does as well as everyone expects, comes out on schedule and is oversubscribed as I believe it will be, it could have a huge impact on the stock market in general and the IPO market specifically,” said Louis Basenese, an IPO expert who is the editor of the investment newsletters The Hot IPO Alert and The Takeover Trader. “It could give deal underwriters a renewed confidence in the IPO market and could green light the many deals now waiting on the sidelines. If it comes out on schedule and does well, it’s a green light. If it’s delayed for any reason – even if there’s no real problem – it’ll be a huge red light.”

When it comes to the Visa deal, Basenese sees no red lights, stop signs or warning signs of any type. In fact, according to his calculations, Visa’s shares could be worth $80 by the end of this year – and perhaps more, if all goes according to plan.

It could even revitalize the U.S. IPO market, which has been enduring one of its toughest stretches in years.

Ending the “Manic” Market for IPOs

At a time when U.S. investors are losing confidence in stocks, a rejuvenated IPO market could play a key role in rejuvenating the major indices.

A year ago, when stocks were soaring to new record highs, private-equity deals, leveraged buyouts and big corporate mergers were helping fuel a lot of the advance. Investors were willing to pay up for stocks, reasoning that they had a good chance of bailing out with a handsome windfall if their company was “taken out” by a hedge fund or a buyout artist.

But hedge funds, private-equity players and even corporations looking to get leaner and meaner are only aggressive about these deals themselves when there’s an easy way to “cash out.” And that “cash-out” strategy means there has to be a healthy IPO market. A private equity fund buys a company that’s stumbling a bit, but still has a good business, taking it private. They invest some capital, and devote some management attention to the firm. Two years later, they sell the revitalized company to investors via an IPO that sends the company’s stock rocketing skyward on its first day of trading as a newly public company.

And everybody’s happy.

When the IPO market stalls, however, those buyout deals slow to a trickle, and the market’s former record advances come to an end.

“Weakness in the overall stock market translates into the IPO market," Jay Ritter, professor of finance at University of Florida, told Reuters in an interview. “The IPO market tends to be hypersensitive to movements in the broader market … and this hypersensitivity tends to make the IPO market somewhat manic depressive.”

With the Standard & Poor’s 500 Index down more than 11% so far this year, underwriters remain wary of bringing new stock deals to the market. In January and February alone, 30 U.S. IPOs were withdrawn or postponed, reports IPO data provider Dealogic. Globally, during that same two-month stretch, more than twice than many IPO deals were shoved onto the back burner.

The spiraling global credit crisis has only made matters worse. In January and February, IPO hopefuls around the world shelved stock worth $21.4 billion, which was almost twice the value of the new shares that actually were issued, according to data from Thomson Financial.

Globally, 92 IPO issuers raised just $12.2 billion in the year’s first two months – the worst start to the year since 2003.

And the role of the United States in the IPO market continues to slip, as the biggest deals getting done continue to come from other markets abroad. Of all the IPOs issued globally in January and February, only 7% emanated from U.S. companies, down from last year’s still-lackluster 33%.

“We are off to our worst start for IPOs in the United States since 2003," Richard Peterson, director of capital markets at Thomson Financial, told Reuters. "There have only been nine deals priced so far this year and there hasn’t been a deal priced in the past two weeks.”

According to the Securities and Exchange Commission Form S-1 filings, there are 186 companies that have already filed to go public and that are now waiting on the sideline, including 58 that have filed this year, said Basenese, the IPO newsletter editor.

The Visa deal could help break up the logjam. Indeed, the fact that it’s been moved up is highly positive and means the deal is probably a good one for investors, he said. His reasoning: In all his years covering the IPO market, he’s yet to see the underwriters move up a poor IPO deal.

Not everyone believes this will help the U.S. IPO market.

David Menlow, president of IPOfinancial.com, told AFX News that “we have an IPO market anomaly with Visa. This is a singular seismic event that is not going to re-ignite the market as far as instill confidence or bring more deals into the system.”

Francis Gaskins, president of IPODesktop.com, agreed, stating that this IPO is “a unique, one-time event. All eyes will be on Visa and then it’s over.”

But even if that’s the case – and the IPO doesn’t re-ignite the U.S. stock-offering market – Visa’s shares can still be a profitable play for investors.

Here’s why.

The Keys to the Deal

According to Basenese, the Visa deal is one of the better IPOs to come down the pike in some time. For one thing, the company is the market leader, dwarfing its rivals in terms of both transaction volume and total transactions [See accompanying chart].

Chart 1: Visa the Giant

As the largest processor of retail payments the world, Visa Inc. dwarfs its rivals. It accounts for 60% of the debit-card transactions in the U.S. market – a four-to-one advantage over rival MasterCard. As the chart demonstrates, it is also bigger by total transactions and total volume.

Sources: The Hot IPO Trader, Money Morning.

Visa is an electronic payments network that focuses on retail transactions. It actually acts as a facilitator of global commerce, enabling money and information to move among banks, retailers, consumers, businesses and even government entities.

There are three basic points investors need to understand – especially with the chaotic credit markets investors now face, Basenese says:

• Visa is not a credit-card issuer.
• It’s not a lender.
• And it’s not exposed to consumer-credit risk.

The bottom line: Visa is simply a transaction-processing company that collects a fee based on the number and dollar value of the transactions that it processes, he said. In short, this is a financial-services company whose shares investors can snap up with confidence and a feeling of safety, since there aren’t any worries that another credit-crunch-related catastrophe could obliterate its business and send its shares into the ground overnight, Basenese said.

Investors have been eager to grab shares in Visa’s offering as shares of the much-smaller rival MasterCard Inc. (MA) have more than quadrupled in value since the company went public in May 2006. MasterCard shares have largely been untouched by the stock-market turmoil generated by the ongoing credit crisis and closed yesterday (Monday) at $201.52, down $7.13, or 3.42%. They are down 11% from their 12-month high of $227.18.

A Profitable Profile

With a public company, at the end of the day, it’s always about earnings. And Visa is poised to deliver profit growth. In its latest quarterly report, Visa generated $1.49 billion in revenue and $430 million in profits [excluding one-time events]. Company managers are conservatively projecting that profits will advance at a 20% clip.

But with his own analysis, Basenese uncovered three catalysts that will help Visa boost its profit-growth rate up to the 30% to 35% pace. Those three key catalysts:

• No Chinks in its Armor: To generate profits, a company has to have strong sources of revenue. And Visa does. In fact, Basenese says there’s “not a weak spot in this company’s revenue mix.” Sales are increasing at healthy, double-digit rates across all business segments and in all geographic markets.
• Killer Cost Controls: Since 2003, the total number of transactions Visa processes have soared 61%, but costs have increased only 12%. And since the company’s VisaNet payment-processing network is capable of handling double its current volume without really increasing its costs, incremental additions to revenue will translate into “dramatic increases” in earnings, Basenese says.
• A Less-Taxing Tax Rate: Before the stock offering, Visa didn’t really have to fret about its tax rate, since it wasn’t a public company that had to engage in the quarterly cow-towing to Wall Street. As a result, it’s one of the few companies with a horrid tax rate of 41%. Even archrival MasterCard boasts a tax rate of only 35%. But now that it’s a public company, Visa will pull out all the stops in its efforts to pare its tax rate. If it gets down to MasterCard’s level, a 6% reduction in the tax rate on hundreds of millions of dollars in income will have a big impact on the bottom line, Basenese says.

Going Global For Growth

The global payments sector is undergoing a true paradigm shift – away from cash and checks in favor of one that’s card-based and highly focused on electronic transactions. Since 2001, transactions using credit and debt cards went from 13% of payment volume to 27%, a compound annual growth rate of nearly 15%.

As dramatic as that metric is, it’s important to note that Visa grew at double that rate during the same period.

Expect the trend to continue – and to expand globally.

According to The Nilson Report, a newsletter that focuses on the payments industry, the purchasing card market will expand at an annual rate of at least 11% on a global basis between now and 2012. And much of the growth will be generated internationally – especially in the emerging markets.

Once again, Basenese says that his analysis has found that Visa is poised to grow faster than the market, which means that it’s going to grab market share from rivals.

First, two-thirds of Visa’s debit cards are in foreign hands, where consumer-spending levels are on the rise and where the use of electronic-payment technologies is still in its infancy.

And, second, research shows that six out of 10 consumers prefer Visa cards. That kind of brand loyalty means that Visa will be able to introduce new products with very little resistance. Visa already plans to introduce those products in four key areas: Prepaid cards, money-transfer technologies, e-commerce and mobile-transaction-processing.

At a time when U.S. consumer confidence is ebbing quickly and when fears of a major potential recession are escalating, investors need to note that Visa’s business is increasingly becoming almost recession proof. Here’s why:

• Research underscores that 42% of Visa’s revenue is derived from non-discretionary spending, meaning that a lot of that revenue won’t disappear even if consumers and businesses make major cutbacks in their outlays for luxuries or other non-essential goods and services.
• During the last two recessions, Visa continued to grow – both in terms of total transactions and total volume. And in each of the last 13 months – as a recession becomes more and more likely – Visa’s business has continued to grow at double-digit rates.

The Right Play at the Right Time

According to Basenese, Visa’s shares could be worth $80 by the end of this year – and perhaps more, if all goes according to plan. The stock actually will pay a small dividend – about 1%, based on the projected IPO price. That’s a rarity among newly public companies. But Money Morning Investment Director Keith Fitz-Gerald puts a premium on stocks that generate income.

Basenese likes the company, its business plan, its market position, and its financial strength.

“The pitch for Visa is simple,” he said. “It’s a rare opportunity to own a piece of a relative monopoly.”
[Editor’s Note: Louis Basenese is the editor of The Hot IPO Alert and The Takeover Trader newsletters, and is a contributing writer to Money Morning. Basenese last wrote about how to profit from the takeover market. To learn more about The Oxford Club and its publications, please click here.]

(*) With potential over-allotment provisions, total proceeds from the Visa IPO could reach $19 billion.

Sources: The Hot IPO Trader, Money Morning, Reuters

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Various industries in Iran are beginning to feel the pinch as bankers around the world have cut back lending to satisfy the U.S. government’s demands.

U.S. efforts to halt Iran’s uranium enrichment program stalled in the United Nations, thwarted by Russia and China. But U.S. Treasury officials Stuart Levey and Robert Kimmitt have spearheaded a campaign to curb lending to a country the United States perceives as a global threat.

Banks such as UBS AG (UBS), Deutsche Bank AG (DB), and HSBC Holdings PLC (HBC) have taken heed, reducing lending to Iran, and in some cases, cutting it off all together.

"We do absolutely no business in Iran," Serge Steiner, a spokesman for UBS, Europe’s biggest bank by market value, told Bloomberg News.

Deutsche Bank, Germany’s largest financial institution, said in July that it was retreating from Iran as well.

"We have sent a letter to private clients in Iran who have an account with Deutsche Bank in Germany, and told them that we have to terminate our business relationship with them," Deutsche Bank spokesman Ronald Weichert said last year.

Iran is indeed an oil rich nation. It ships about four million barrels of crude a day and accounts for 5% of global supply. But an unnamed German banking analyst told Forbes that Deutsche Bank’s interest in the Iranian oil business was inconsequential.

"I think leaving Iran improves the business opportunities [for Deutsche Bank]," he said. "Iran is a small country. It’s not worth it to deal with Iran and then lose business in the U.S."

Six months ago, the Organization for Economic Cooperation and Development cut Iran’s country-risk rating for export credits to the second worst level. It now shares a category with Albania, Bangladesh and Mozambique.

The number of banks doing business with Iran has dropped substantially in the past two years. According to Bankers’ Almanac, the number of institutions used by Bank Saderat Iran, one of the country’s largest banks, have fallen from 29 in 2006 to 8.

The result of such precautionary measures has been detrimental to Iranian business, which has been deprived of funds necessary to acquire equipment and services. European Union data agency Eurostat reported that machinery and transportation equipment exports to Iran dropped 20% in the first nine months of 2007 from the previous year.

Financial institutions are in the midst of a global credit crunch and most are shying away from riskier investments. That doesn’t bode well for Iran, which lacks the technology and equipment to develop its natural resources on its own. Without foreign investment, Iran is an island.

"Banks tend to be very, very conservative creatures," Peter Djinis a former member of the Treasury’s Financial Crimes Enforcement Network told Bloomberg. Until they hear directly from the U.S. government that Iran can be trusted, "there will not be any wavering." 

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Dubai’s ambitions to become the leading financial hub of the Middle East got yet another lift last week when the initial public offering of Dubai Ports World raised nearly $5 billion, making it the biggest IPO ever in the region.

Strong demand for the port operator’s shares – priced at the top end of the range at $1.30 each – induced the firm to boost the percentage of the company’s equity offered from 17% to 23%. Last week, the government-owned holding company, Dubai World, said that the  $4.96 billion raised made it the largest-ever Middle East IPO, valuing DP World at $21.6 billion.

"We are delighted with the response to the IPO and pleased so many investors want to share in the future of DP World," company Chairman Sultan Ahmed bin Sulayem told journalists. "The fact the IPO has been so heavily oversubscribed reflects the market’s confidence in the business, its management, and the company’s potential in the future."

It also reflects the attraction of more-developed emerging markets like those of the Middle East to international investors looking to flee the financial turbulence of the Western markets – turbulence a growing percentage of experts now fear is a prelude to a major recession. Although the weak U.S. dollar is affecting Gulf countries with currency pegs to the greenback, the high price of oil and the diversified investments of the region’s sovereign wealth funds are boosting growth.

The boom in Middle East investors looking to sink their petro-dollars into more long-term investments has seen the financial capitals of the West get in on the act. And the so-called "Sovereign Funds" – investment vehicles funded and managed by the state – have played a huge role.

DP World operates 42 terminals in 22 countries, but its government-owned origins generated controversy when the company acquired P&O Ports North America in 2006. By December, DP World had sold its newly-acquired American assets to American International Group. Subsequent to that, the surge of activity of sovereign wealth funds for international investments has shown no sign of slowing. Qatar and Dubai have both competed for stakes in OMX, NASDAQ and the London Stock Exchange, while Qatar nearly shelled out $22 billion for British grocer J Sainsbury.

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Most of us know Sony Corp. (SNE) as Japan’s electronics and videogame juggernaut. But its upcoming IPO will add another public dimension — insurance and financial services juggernaut.

Yesterday (Tuesday), the Tokyo Stock Exchange approved the application for the listing of the common shares of Sony Financial Holdings. Sony Corp. will sell about $2.9 billion (332 billion yen) in Sony Financial, making for Japan’s biggest IPO of the year.

Pricing for the 725,000 shares available — 34.5% of the Sony Financial — will be set on Oct. 1. Trading will begin Oct. 11. Sony also states that Japanese underwriters may allot an additional 70,000 shares, which can be bought with an exercisable option available until Nov. 2.

However, most United States investors won’t be able to get a piece of this action. Sony Financial’s offering to the U.S. market is limited to a private placement of "qualified institutional buyers," says the company’s news release of the sale.

This isn’t an entirely new venture for the world’s second-largest electronics maker. Sony Financial operates Sony Bank in addition to auto and life insurance firms — accounting for 9% of Sony’s group revenue in the fiscal year ending in March, MarketWatch reported.

Sony Financial began in 1979 as a Sony Prudential Life Insurance Co., Ltd., a joint venture between Sony and Prudential Financial Inc. (PRU). Over the years, it added auto insurance, fire insurance and banking to its service roster, according to the company’s corporate Web site.

Steady Revenue Stream

The IPO’s timing — in the middle of swaying opinions and shifting international interest rates from the U.S. subprime crisis — could be hailed as either perfect (standing out because of the vastly reduced number of IPO deals) or doomed to fail (finding a shortage of demand because of investor uncertainty).

"Investors are still concerned about the losses from subprime loans," Wataru Kasatani, a financial analyst at Meiji Dresdner Asset Management Co., told Bloomberg News. "The question for the Sony Financial IPO is how it can persuade investors that it is free from that concern."

Unlike the widely publicized spin-off of VMware Inc. (VMW) from parent-company EMC Corp. (EMC) in August, don’t expect Sony Financial to be the new pivot of Sony Corp.

Sony Financial intends to net a little more than 10% (31.1 billion yen) of the IPO, and about half of that (16.5 billion yen) will be invested with Aegon NV (AEG), a Dutch insurer.

Rather, Sony Financial is intended to be a steady revenue stream for a company in need of more financial leverage in the highly competitive electronics market.

A wise move? Yes. Behind the curve? Yes.

Sony’s move for diversification is peanuts compared to South Korea’s Samsung Corp. In addition to its electronics arm, Samsung dips into chemical production, manufacturing machinery, construction, sports franchises and financial services and insurance.

Nonetheless, news and analysis of the IPO will continue to swirl until Oct. 11. The headlines will be a nice distraction from Sony’s recent reputation as makers of the underperforming and (arguably) overpriced Playstation 3.

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Newly public software firm VMWare Inc. (NYSE: VMW) saw its shares climb another $6.71 each, or 13.16%, to close at $57.71 yesterday (Wednesday), the day after the company went public at $29 a share and soared 76% in its first day of trading. That made VMWare the best performing initial public offering, or IPO, of this year.

Prior to the VMWare offering, the top-performing U.S.-listed IPO was Fortress Investment Group LLC (NYSE: FIG), which climbed 67.6 % on its Feb.8 market debut.

A unit of data-storage giant EMC Corp. (NYSE: EMC), VMWare raised nearly $1 billion by selling 33 million shares at $29 each. VMWare specializes in a process known as "virtualization." It enables a single computer to function like multiple machines, which means companies can spend less on equipment and energy in their data centers. The rising demand for virtualization software is expected to generate more than $1 billion in sales for VMWare in just this year alone, but many industry analysts say that the greatest profit opportunities for this sector are still ahead.

Shares of VMWare Inc. (NYSE: VMW) soared 76% in their first day of trading yesterday (Tuesday), making the Palo Alto-based data-virtualization company the best-performing initial public offering of the year.

Prior to the VMWare offering, the top-performing U.S.-listed IPO was Fortress Investment Group LLC (NYSE: FIG), which climbed 67.6 percent on its Feb.8 market debut.

A unit of data-storage giant EMC Corp. (NYSE: EMC), VMWare raised nearly $1 billion by selling 33 million shares at $29 each. VMWare specializes in a process known as "virtualization." It enables a single computer to function like multiple machines, which means companies can spend less on equipment and energy in their data centers. The rising demand for virtualization software is expected to generate more than $1 billion in sales for VMWare in just this year alone, but many industry analysts say that the greatest profit opportunities for this sector are still ahead.

In a report released yesterday, Jefferies & Co. analyst Katherine Egbert said VMWare appears to be traveling on the same lucrative trajectory as two of the software sector’s biggest success stories: Microsoft Corp. (Nasdaq: MSFT) and Oracle Corp. (Nasdaq: ORCL), two software makers whose combined market value 21 years after their IPOs is a combined $364 billion.

With that promise, it’s no wonder that the company said late last night that the underwriters of its initial public offering had exercised a “green shoe” – or over allotment option – to buy another 4.95 million Class A shares. These shares are in addition to the 33-million share offering of yesterday, and will be bought at the offering price of $29 each.

"This is certainly more than just about anyone expected," Gartner Inc. analyst Tom Bittman told The Associated Press. "Maybe the market is a little giddy."

On Monday, VMWare sold 33 million shares at $29. After the bell rang, the stock had rocketed to $50, on huge volume. It climbed to the $55 mark early afternoon, finally closing at $51 in regular trading. In all, more than 38 million shares changed hands. Citing a report by IPOhome.com, the AP reported that VMWare’s increase from the IPO price was the best first-day gain since last December, when the shares of a smaller high-tech company, Isilon Systems Inc., rose by 78 percent, according to IPOhome.com.

Investors are hoping that VMWare’s launch provides a much-needed kick to the tech sector, which has been down over 13.3% in the last month (the Standard & Poor’s 500 Index is down 7.6% in that span). However, those expectations were met with disappointment Tuesday as the tech sector continued its slide under the weight of the falling stock market.

VMWare is a spin-off of EMC (NYSE: EMC), the world’s No.1 maker of data-storage hardware. After making a name for itself in the ’90s tech boom, EMC bought VMWare for $635 million in 2004. In February, it decided to sell 10% of the unit, prompting chip-giant Intel Corp. (Nasdaq: INTC) to spend $218.5 million for a 2.5% stake in VMWare’s outstanding shares. Not too long later, Cisco Systems Inc. (Nasdaq: CSCO), the biggest maker of computer-networking equipment, bought $150 million in shares for a 1.6% stake.

Why the hype? VMWare’s software allows the powerful server computers that act as the brains and traffic cops of high-speed computer networks to run several different computer-software operating systems – including the Windows Vista system marketed by Microsoft. It will cut the costs of energy, labor and additional servers.

In its registration statement, VMWare said that its net income for the quarter ending June 30 was $34.2 million, more than double the profits of $15.2 million recorded for the same quarter a year earlier. Revenue soared 90% to nearly $297 million.

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At a time when the U.S. stock market is at its volatile worst, the initial public offering of a high-tech company is looking better all the time. The VMware computer-virtualization unit of data-storage giant EMC Corp. (NYSE: EMC) has just boosted the size of its initial public offering to as much as $1.1 billion, making it potentially the biggest IPO of a high-tech firm since Google Inc. (Nasdaq: GOOG) went public in 2004.

Google, owner of the No. 1 Internet search engine, raised $1.92 billion in its August 2004 IPO. This year, The Blackstone Group LP (NYSE: BX) has been the biggest public offering, followed by MF Global Ltd. (NYSE: MF) and MetroPCS Communications Inc.(NYSE: PCS).

The Palo Alto, Calif.-based VMware, whose software is used to run server computers, will sell 33 million shares for $27 to $29 each, according to a regulatory filing made yesterday (Thursday). That’s actually a substantial increase just from July, when the company predicted those shares would sell for $23 to $25 each.

If all shares are sold at the top price, VMware may rank as the fourth largest U.S. offering this year, according to data compiled by Bloomberg News. The firm’s software allows the powerful server computers that act as the brains and traffic cops of high-speed computer networks to run several different computer-software operating systems – including the Windows Vista system marketed by Microsoft Corp. (Nasdaq: MSFT).

EMC is the world’s No. 1 maker of data-storage hardware and software and was one of the great growth-stock stories of the 1990s. It bought VMware in 2004 for $635 million, and in February decided to sell about 10 percent of the unit. Other key tech-industry players apparently feel that VMware has valuable technology: Last month, chip-giant Intel Corp. (Nasdaq: INTC) said that it’s Intel Capital venture-financing unit would spend $218.5 million for a post-IPO stake of 2.5% of VMware’s outstanding shares. Cisco Systems Inc. (Nasdaq: CSCO), the biggest maker of computer-networking equipment, said it will buy $150 million of shares for a 1.6% stake.

In its registration statement, VMware said that its net income for the quarter ended June 30 were $34.2 million, more than double the profits of $15.2 million recorded for the same quarter a year earlier. Revenue soared 90% to nearly $297 million.

VMware plans to list its shares on the New York Stock Exchange under the symbol ‘VMW.’

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