How Worried Should Visa Inc and MasterCard Inc’s Shareholders Be Right Now?

Visa and MasterCard are facing dozens of lawsuits by large and powerful retailers. How will this affect the companies' bottom lines?

Jul 23, 2014 at 6:00AM

Recently, a federal judge decided not to dismiss antitrust lawsuits against Visa (NYSE:V) and MasterCard (NYSE:MA) by retailers who claim the two companies fixed credit card fees and discouraged the use of lower-priced competition.

Visa Logo

source: company

This could end up costing the company billions of dollars over the next several years. Just what are the companies facing and how badly could it affect the bottom line?

Mastercard Logo

source: company

What are all the lawsuits about?
Basically, there has been an ongoing legal battle alleging that Visa and MasterCard implemented price-fixing schemes in regards to the swipe fees charged to merchants.

In December of last year, the companies agreed to pay $5.7 billion to settle a class action antitrust suit covering about seven million U.S. retailers alleging improper price-fixing, estimated to be the largest antitrust settlement in U.S. history. However, many retailers opted out of the settlement, with many claiming the amount was inadequate to cover the damages.

The companies currently face about 30 additional lawsuits, including some from giants like Target and Macy's. Separately, the largest U.S. retailer, Wal-Mart, is suing just Visa, seeking at least $5 billion in damages.

How much could Visa and MasterCard be on the hook for?
It's tough to estimate the potential liability, or even if any of the lawsuits will be successful, at this point. However, the list of companies suing includes some retail power-players.

In addition to Target and Macy's, other plaintiffs include Kohl's, J.C. Penney, Office Depot, Abercrombie & Fitch, and L Brands, just to name a few. And, if the Wal-Mart lawsuit is any indication, we could see billions in settlements tacked on to the $5.7 billion the companies already have to pay.

As a rough estimate, the damages sought by Wal-Mart represent about 1% of the company's annual sales. Using this as a guide, the companies suing could be seeking about $2 billion, and the actual amount may easily be higher, since they are all suing Visa and MasterCard, while Wal-Mart is choosing to only go after Visa.

Should shareholders be worried?
Well, sort of, but it's not likely to have a major impact on either company. The companies are expected to earn a profit of about $9.3 billion this year combined ($5.7 billion for Visa, $3.6 billion for MasterCard), so any further settlements could indeed take a big bite out of the companies' bottom lines.

However, the suits will likely be drug out for several years, and will probably be settled for substantially less than the amounts the companies want, so it's probably not going to have a tremendous impact. Plus, as we've seen in all of the banking industry's legal settlements lately, big companies like Visa and MasterCard are very good at anticipating the impact of legal settlements and will set aside money accordingly.

While the uncertainty of the situation might make shareholders a little uneasy, and rightfully so, don't worry too much. Know that both companies are well aware of the potential impact of the pending lawsuits and the market experts are too. Any legal risk is already factored into the share price of Visa and MasterCard.

So rest easy...Visa and MasterCard's commanding market share isn't going anywhere, and all of these additional settlements will seem like a speeding ticket in the long run. If anything, any dips in the share prices caused by legal headlines could create nice buying opportunities.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends MasterCard and Visa. The Motley Fool owns shares of MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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