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Visa's Stake in Square: What You Need to Know

By Dan Caplinger – Feb 15, 2016 at 2:21PM

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Many see the card network giant's stake in the rising mobile payments company as a warning shot to rivals.

Image source: Square.

For decades, Visa (V 1.16%) has been a pioneer in the way people pay for the things they buy, starting with its signature credit cards and moving on to become a giant in electronic payments. Yet the industry has continued to evolve, and now, the rise of making payments using mobile devices has forced Visa to respond with efforts to defend its territory from upstart companies like PayPal (PYPL -2.39%) and Square (SQ -14.82%). Earlier in February, Visa gave some details about the investment it has made in Square, and many investors celebrated the news by sending Square shares higher. The more important question is how Visa's stake in Square could affect the entire industry, especially Square's fight against PayPal.

Details on the Square stake
Visa made an investment in Square back in 2011, long before the mobile payment specialist went public. Visa never gave details on the terms of its Square purchase five years ago, but the deal served vital purposes for both companies. For Square, the Visa investment lent the small company credibility in the rapidly growing mobile payments space, which at the time had a large number of potential competitors seeking to put their stamp on the industry and take a leadership role. It also gave Visa's tacit seal of approval on issues like security and credit card fraud for those using Square. Meanwhile, for Visa, the investment in Square gave the credit card giant access to some of the innovative moves that the mobile specialist has made, and it opened the door to potential partnership opportunities down the road.

Visa made public some of the terms of its investment in Square in an SEC filing on Feb. 11. When you first look at the filing, it indicates that Visa has beneficial ownership of more than 3.52 million shares of Square Class A common stock, which it reported as being 9.99% of the total stock available in that share class.

Some investors mistakenly saw the filing as evidence that Visa had taken a new stake of roughly 10% in Square. That helped send Square shares soaring, and it created speculation about whether Visa might end up taking over Square entirely at some point in the future.

A smaller deal
Further down in the filing, other details filled in some blanks. Visa's stake in Square is actually held in the form of almost 4.2 million Class B shares, of which 3.52 million are convertible to Class A stock on a share-for-share basis.

Visa had to explain exactly what that meant in follow-up interviews with reporters. Technically, Visa's stake could be as large as 10% of Square's outstanding Class A shares if Visa converted its Class B shares and if no other shareholders owning Class B shares chose to make conversions at the same time. That was the basis for reporting the stake to the SEC in the way it did.

However, Visa said that if other shareholders who own Class B stock chose to convert to Class A shares at the same time that Visa did, then its overall stake in Square would be much smaller. The credit card giant said that on the whole, its financial stake in Square amounts to about 1% on a fully diluted basis, which obviously is far less important than a 10% position would be.

Looking forward
Speculation about a Visa takeover of Square won't disappear regardless of the size of the position, and it won't be the first such discussion. Square has long been seen as a takeover candidate, both from financial industry players like Visa or PayPal and from tech giants seeking to stake their claim in the mobile payment arena.

Visa's recent filing reawakened that speculation, and it's certainly not impossible that the two companies could forge a closer bond in their joint fight against PayPal in the future. For now, though, action doesn't appear as imminent as it seemed a few days ago.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings and Visa. 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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