U.S. stocks are ahead in early afternoon trading on Monday, with the Dow Jones Industrial Average (^DJI 0.00%) and the S&P 500 (^GSPC 1.05%) up 0.48% and 0.64%, respectively, at 12:15 p.m. EDT. However, shares of Visa Inc are underperforming, down 3.11%, as the market gives a lukewarm reception to the announcement that it is acquiring Visa Europe in a transaction valued at as much as 21.2 billion euros ($23.4 billion).
Visa announced today that it will acquire Visa Europe for as much as 21.2 billion euros ($23.4 billion). Visa Europe's members -- 3,000 European banks -- will receive 11.5 billion euros in cash upfront, preferred stock convertible into Visa class A common stock valued at 5 billion euros, and an "earn-out" cash payment of up to 4.7 billion euros, based on revenue targets over a four-year period.
The acquisition corrects something of an aberration and is long overdue: It never made much sense for two companies that share a ubiquitous, monolithic brand like Visa -- and that already maintain shared technology and information -- to remain separate.
Visa Europe remained separate in 2007 even as Visa's operations worldwide came together under Visa Inc, which went public in 2008. MasterCard Europe was already a subsidiary of MasterCard Inc when it went public in 2006.
The impetus to bring Visa Europe under the same roof is particularly strong at a time when payments processing incumbents Visa and MasterCard are facing new competitors riding a wave of technological change. These include PayPal, Alibaba's Alipay, and Apple Pay, among others. In the face of such threats, Visa needs to be able to develop and implement a consistent strategy.
Finally, the deal addresses another Visa weakness relative to rival MasterCard: its dependency on the U.S. market, which accounted for more than half (54%) of fiscal 2014 revenues. The same figure for MasterCard is just 39%.
Furthermore, even though Europe is sometimes viewed as economically moribund, it represents a genuine growth opportunity for payments processors. In Europe, 37% of personal consumption expenditure, with a value of $3.3 trillion, is done via cash and cheque.
(According to data from the Federal Reserve Bank of San Francisco, cash and cheques represented 33% of consumer transactions by value in the U.S. in Oct. 2012.)
While it appears the market is panning the deal today, sending Visa's shares lower, this is more likely related to the results the company reported for its fiscal fourth quarter this morning. Revenues of $3.6 billion were in line with the consensus estimate, but earnings per share of $0.62 were 2% shy of analysts' expectations.
In addition, Goldman Sachs called Visa's earnings guidance for the current fiscal year "slightly disappointing." Visa estimates net revenues will grow in the "high single-digit to low double-digit range," with adjusted EPS growth in the "low end of the mid-teens range."