A (mostly) surprise-free annual meeting? Priceless

By ALEX PHILIPPIDIS

Westchester County Business Journal

July 24, 2006

westchestercbj.com

A Pennsylvania shareholder showed the chief executive officer a photo of himself with someone dressed as the Grim Reaper.

Other than that, MasterCard Inc.’s first annual shareholders meeting as a publicly traded company offered few surprises –– and some insight on the credit card giant’s thinking as it strives to overcome a trio of lawsuits that threaten to torpedo its share price.

Arthur Litoff of York Springs, Pa., amused attendees in a half-empty auditorium with his tale of how a bank declared him dead following a credit card billing dispute. While not positive the card was a MasterCard, Litoff challenged the company to lead its industry in simplifying and presenting plainly to consumers the terms and conditions of its payment products.

MasterCard CEO Robert W. Selander didn’t accept the challenge but did apologize for Litoff’s plight and made him an offer: "In the future if you do have any problems –– and I do hope it will be with Visa and not MasterCard –– we’ll be happy to try and intervene with one of these organizations (member banks) so that the solution is taken care of to your satisfaction.

Litoff provided the lightest moment in a meeting devoted largely to routine business. Holders of class A stock elected Selander and seven independent directors to MasterCard’s board of directors, while one director was chosen by the member banks that oversaw MasterCard before it went public.

European shareholders elected 17 members of the company’s European board. Also, PricewaterhouseCoopers was selected as independent auditor.

LEGAL CHALLENGES

In a question-and-answer session with reporters after the meeting, Selander acknowledged the challenge of the three lawsuits. MasterCard faces legal challenges from:

• American Express Co. (AmEx) and Discover Financial Services L.L.C., which accuse MasterCard and Visa of preventing member banks from issuing cards for the rival plaintiffs.

• Dozens of retail groups, including convenience stores, drug stores, grocers and pharmacists. They have filed several federal class-action suits to end "interchange" fees charged by credit card-issuing banks for converting charges on the cards into cash deposits at merchants’ checking accounts. The retail groups also want to undo MasterCard’s IPO.

• The European Union (EU), also over interchange fees.

MasterCard has set aside $89 million to resolve the EU suit, Selander disclosed: "It is a signal that we’re pretty confident we’re going to be able to put that behind us."

Selander said the company is less confident about being able to resolve the merchant and AmEx-Discover suits, but will keep trying.

"It’s clearly in our interest to try and get as much as what I view now as legacy litigation, from our prior ownership and governance structure, to try and get that behind us," Selander said, answering a Business Journal question. "Having said that, I’m dealing with shareholders’ money. And so I’m not just going to go throw money at cases for the purposes of solving them."

Settling the lawsuits will help keep MasterCard’s stock price healthy. Shares of MasterCard ended July 18 trading at $43.90 on the New York Stock Exchange, down 9 cents from a day earlier but still 13 percent above the $39 price on the day of its initial public offering May 25.

MasterCard shares attracted a lot of institutional buyers eager to snap up shares at a lower than originally expected price, said Francis Gaskins, editor of Gaskins IPO Desktop in Marina Del Rey, Calif.

Can the company’s current numbers be sustained?

"It just depends on how they execute their plan and what happens in a competitive market and what management does," Gaskins said.

Selander says the $650 million raised for itself through its $2.3 billion IPO will position MasterCard well for making future acquisitions. In 2002, the company sought to strengthen its transactions processing when it agreed to merge with Britain’s largest debit card issuer Switch Card Services Ltd. The merger will be completed next year.

"If we do see an opportunity and it is aligned with our strategy, it’s financially appropriate, it’s something we can integrate. . .and is something that either brings us management or that we know we can manage, that would be the screening criteria we would use to evaluate any potential acquisitions," Selander said.

REPLACING CASH

Selander said MasterCard will expand in part through acquisition, as well as stepping up deployment and promotion of its PayPass cash-replacement system, which uses radio frequency identification technology.

MasterCard hopes those and other moves will help it reverse its sliding market share of recent years. MasterCard commanded 28.9 percent of the U.S. credit card market in 2005, second to Visa with 53.9 share of market, according to CardData. American Express and Discover rounded out the top four.

Last year Visa gained more than a quarter percentage point on MasterCard, whose $560 billion in gross dollar volume was just over half of Visa’s.

MasterCard released data it gathered since last September, plus data from a PayPass user the company would not identify ––– showing customers with PayPass use the system more than traditional debit or credit cards.

Purchases of $25 or less account for about 75 percent of all such transactions; larger purchases require verification through a signature or personal identification number. The average PayPass transaction is about $20. As of June 30, some 10 million PayPass devices were in use.

"We have 300 million cards in the United States, so relative to the potential, we have a long way to go," Selander said.