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MasterCard: Charging Ahead

Legal issues cast a cloud over this credit-card company, but they don't seem to have rained on investor enthusiasm.

Money raised by MasterCard’s May 25 initial public offering: $2.4 billion. Reduced risk of legal liability through stock sale: Priceless. Just like the commercials, that may overstate the case. But in the view of some analysts, the decision to go public could insulate MasterCard from charges leveled by disgruntled merchants.

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The Purchase, N.Y., company confronts antitrust lawsuits from merchants angry over rising fees they must pay when customers whip out their MasterCards. Morgan Keegan analyst Robert Dodd estimates that the company’s liability from litigation could amount to $3.7 billion after taxes, or about $26 a share. Craig Maurer, an analyst with Fulcrum Research, cautions that "unfavorable rulings could permanently lower revenues and profitability." Neither analyst expects the legal issues to be resolved this year.

MasterCard is the middleman between 750 million branded credit and debit cards and the 24 million locations that accept them. The company authorizes, clears and settles transactions on its proprietary payment network. In a typical $100 transaction, MasterCard keeps 10 cents, the bank that issued the card keeps $1.50 and the merchant receives $98, Maurer estimates. MasterCard generates revenue primarily from these fees.

But merchants who accept MasterCard are unhappy. Many feel that the banks and MasterCard, which set the price for the payment network, have colluded against them. Selling shares to the public enables MasterCard to "distance itself from (collusion) allegations," Maurer says. After the IPO, public shareholders own 46% of the company, banks control 44% and the MasterCard Foundation holds 10%.

The legal cloud over MasterCard has not dampened investor enthusiasm for its stock (symbol MA). The shares opened at $39, climbed to as high as $46.74 and closed Tuesday at $44. The stock trades at 15 times the $2.77 per share that Dodd and Maurer, on average, expect MasterCard to earn this year. Despite the risk of serious courtroom drama, Dodd rates the stock an "outperform" and Maurer calls shares a "buy." MasterCard should benefit as the world shifts from paper checks to plastic cards, they say.

MasterCard runs second to its larger rival, Visa, in most markets. But Maurer expects the number of dollars that flow through MasterCard’s network to increase by at least 12% this year and next.

--Thomas M. Anderson

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