How can I get in on an IPO before it goes public?  The question always comes up when a big IPO is about to make its debut.  In this case, the Visa IPO, which is set to debut sometime in early 2008.  Unless you have friends in high places or a trading account in the millions, you can just about forget trying to score shares in a company BEFORE it goes public.   Some companies are trying to make the whole process more democratic by going the dutch auction route (see Google and Interactive Brokers) but I don’t think that will become the prevailing trend.  For us mere mortals, we must come up with the creative means to finagle a few profits from the Visa IPO before it hits the public.  I have one idea for you.  You probably won’t get rich and hey I can’t guarantee you’ll make a dime (how’s that for a disclaimer – now do your own DD!), but for grins and giggles I thought I’d throw out a back door entry into the Visa IPO bonanza.  National City Corp (NCC).  Huh?  Here’s my reasoning:  National City owns what will be a 4 – 5% stake in the new public Visa.  Considering NCC does just north of 12 billion in revenue a year, it’s won’t amount to a large slice but enough of a slice to potentially start moving the stock out of the cellar.. a deep dark cellar.  I’m not a bottom fisher and don’t recommend it as a strategy, but for you valuation junkies who like to run the numbers perhaps this trade makes some sense down here?

Here’s what the CEO said in the conference call on Wednesday (transcript courtesy of seeking alpha):

Jill Hennessy

In the Visa perspective, National City is highlighted as having an 8% stake in Visa USA. How large of a gain do you expect to take on the Visa IPO and when do you expect to recognize that value?

Peter Raskind

As a result of our issuance activity and our former ownership with MPC we do have an unusually large stake in the newly restructured Visa. As I suspect many of you are aware, Visa restructured in early October into an independent for-profit company with the ultimate intent of taking that company public. As a result of our approximately 8% share in Visa USA, we end up with a share in the new Visa, the new worldwide Visa, somewhere between 4.5% and 5% of a good-sized entity.

There’s quite a bit of discussion going on right now between the various banks involved and the SEC as to exactly how the accounting should occur for this transaction. That is not yet fully resolved. So the restructuring has already occurred. There will be, we hope, resolution within the next several weeks by way of the SEC as to whether that restructuring creates an accounting event or not.

But even if it does not, there is an expectation that the company will go public some time next year and therefore, presumably at that time a gain would be realized. I would not at all engage in speculation as to what the size of that gain is going to be yet today, but given the size of Visa and our stake in Visa, there’s reason to believe that it will be sizable.

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My Conclusion:

Keep in mind this is a strategy for profiting before the IPO.  There will certainly be tremendous profit potential after the company IPO’s.  What I see happening is a tremendous build up to the launch of the IPO followed by some big time profit taking after the stock soars on the first day.  Once the dust settles after a week or two, the stock will offer a tremendous opportunity to get in for the long haul.  Why?  Just look at the numbers:

Visa has a 60% market share which is about as close as you can get to a monopoly in this increasingly cashless world.  Mastercard has about a 20% market share and it more than tripled in its first year of trading.  Size certainly doesn’t equate to stock price performance, but given the fact that the larger Visa will have more resources to ward off the avalanche of litigation from merchants, not to mention better economies of scale it should perform at least as well as Mastercard (MA) has.  At any rate, this will be one of the biggest IPO’s ever, so it should fun to watch it all play out.

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UPDATE 12.30.07

National City stock continues to deteriorate and has yet to clear that down trend which I highlighted in the chart above (so never provided an entry point).  The subprime exposure proved to be too great and the expected Visa benefit isn’t providing any relief.  However, bases on the price and volume action in recent days I’m going out on a limb here and calling a bottom right here right now. 

Barron’s isn’t as bullish.  Have a look at their recent downgrade.

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UPDATE 2.7.07

I was a bit early on my bottom call in NCC on Dec 30th, but now the bottoming action is firmly in place beginning with the big capitulation day on Jan 22nd which is characterized by a record volume reversal off the lows of the day and a close in the upper half of the range for the day.  12.64 will mark an all time low in NCC and I don’t think you’ll ever see that price again considering all the Fed rate cuts.  It’s a bit extended from those levels but retracement of at least half the move might offer a great entry for the long term holder.  A 50% retrace is (18.14 – 12.64)/2 = 2.25, so a move to around 15 provides a good initial entry point.  In fact this is my strategy with all financials and homebuilders.. wait for a retracement of the post Fed cut surge to initiate long term positions.