Understanding Mastercard: Priceless

I've been looking to put a little cash to work, and one of the companies that comes to mind is Mastercard International (MA), the hot IPO of the summer that's getting everyone's attention.

For those who don't know the basic background, Mastercard was a member-owned association that focused on payment processing and franchising its credit and debit card brands and, later, related consulting projects. In the 1990s, it began converting to a more independent share-based business, though still owned by the same banks, and this year it took a stride toward further independence by IPO'ing the majority of the voting shares.

Mastercard was the dominant US card for many years, but is now a distant second to Visa in the US and in most other markets -- if you look at market share and spending around the world, in most places you'll see Mastercard or its affiliates with about half the market share of Visa ... and you'll see Mastercard spending about half as much as Visa on building their market. It's been a nice, tidy system for a while that has allowed both of these companies -- both of which are very lean and consist primarily of brand names and computer networks -- to prosper. Visa remains a private concern, though there has been talk since the MA IPO of Visa doing the same.

Here's what I like about Mastercard:

1. They're part of a near-duopoly in cashless payments, but they're by far the smaller part of the duopoly in most countries, so they might have room to grow market share against Visa.
2. Cashless payments are growing incredibly rapidly around the world, in both developed and developing countries.
3. The business can generate massive amounts of cash with very few employees or capital costs.
4. Growth is projected to be remarkable, and the business is potentially very hihg-margin and scaleable.
   

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Here's what makes me nervous, and has kept me from buying shares so far:

1. The duopoly they enjoy with Visa gets plenty of attention from antitrust lawyers interested in price fixing -- they've settled disputes before, and it's possible that one reason for the IPO was to give Mastercard some independence from its member banks and shield those banks from liability.
2. They're planning to spend an awful lot of marketing money -- and while Visa and Mastercard both have some of the most creative and compelling advertising around, they may just spend each other into the ground with neither company taking market share from the other.
3. Visa might go public, too -- which would take away any advantage that Mastercard may have incurred with the cash inflow from their IPO.
4. While they have a lot of member banks, they are very reliant on Citigroup for a large percentage of their business. Trouble for Citi in growing accounts would mean trouble for Mastercard.
5. The member institutions have a lockup period following the IPO, and it's possible that there could be a wave of selling when that period expires. If I do decide to buy shares, that might offer a better buying environment (though at the rate shares have been climbing, that's certainly no guarantee).
6. Their newfound independence from their member banks might create a more aggressive and independent posture (many of those banks also issue Visa cards), which could lead to more price competition that has the potential to make earnings much more volatile. If Mastercard and Visa start to compete for accounts on price, they could kill the golden goose.
   

I really like the credit card business in general, but the antitrust issues make me a little nervous. I haven't yet reconciled that with the phenomenal growth that their market is seeing as the cashless society grows, but I am looking seriously at an investment in Mastercard or in American Express or one of the big credit card issuers like Capital One (or possible Citigroup or Bank of America).

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