Risk Factors and IPO’s: Visa Inc. case study

Breakingviews.com, a leading international source of online financial commentary, printed an article on “Read the Risk Factors.” Far from empty boilerplate, IPO prospectuses lay out debutant firms’ red flags.  

By law, prospectuses for initial public offerings of stock must contain a section entitled “Risk Factors.” The prospectus contains nearly all aspects of a company’s business and game plan (prospectuses for all U.S. companies are available for free at U.S. Securities & Exchange Commission’s Web site).  

Take, as a recent example, Visa Inc. “Visa Inc. today filed a registration statement with the United States Securities and Exchange Commission (SEC) related to the series of transactions for the planned combination of Visa Canada, Visa International and Visa USA into a single private stock company, Visa Inc. Visa Europe will remain a membership association and will become a licensee of, and own a minority interest in, Visa Inc.”

According to the June 22 Form S-4 Registration Statement for Visa Inc, Risks Related to Our Business (Legal and Regulatory Risks; Business Risks; and Risks Related to the Restructuring). One example under Under Business Risks: “Global economic, political and other conditions may adversely affect trends in consumer spending and cross-border travel, which may materially and adversely impact our revenue and profitability.” The global payments industry depends heavily upon the overall level of consumer, business and government spending. For example, a sustained deterioration in general economic conditions, particularly in the Visa U.S.A. and Visa AP regions, where approximately 70% and 12%, respectively, of our pro forma revenue was generated for fiscal 2006, or increases in interest rates in key countries in which we operate, may adversely affect our financial performance by reducing the number or average purchase amount of transactions involving payment cards carrying our brands. A significant portion of the revenue we earn outside the United States results from cross-border business and leisure travel, which may be adversely affected by world geopolitical, economic and other conditions, including the threat of terrorism and outbreak of diseases such as SARS and avian flu. In particular, revenue from processing foreign currency transactions for our members fluctuates with cross-border travel and our members’ need for transactions to be converted into their base currency. In addition, as we are principally domiciled in the United States, a negative perception of the United States could impact the perception of our company, which could adversely affect our business prospects and growth.” 

Note the section on “Risk Factors” is listed before “Cautionary Statement Regarding Forward-Looking Statements,” which are based on current expectations or projections about a company’s business, operations, industry, financial condition and liquidity.