A flurry of reports in early February 2016 claimed that credit card company Visa owns nearly 10% of payment processing company Square. Updates to those stories were posted soon after, as the 10% figure was based on a misreading of a Visa filing with the Securities and Exchange Commission.
But some of those clarifications have gotten lost in the noise as investors have rushed to Square (its stock jumped in the days following the first reports) and some began to predict that Visa will purchase Square. Before we jump to conclusions, let’s slow down and take a look at the facts.
- What Visa Really Owns in Square
- Class A Shares vs. Class B Shares
- Where did the 10% number come from?
- So is Visa buying Square?
What Visa Really Owns in Square
Visa owns 4.19 million shares of Square’s Class B common stock, from an investment in 2011. The company clarified that it has not bought or sold shares of Square since that initial investment, as some reports incorrectly indicated that Visa’s shares were a new investment. Furthermore, Visa does not currently have any Class A shares (as some mistakenly reported) and the 10% stake claimed is not quite accurate, as we’ll explain further below.
Payment news source Digital Transactions states that there are 327.9 million Class A and Class B Square shares combined, putting Visa’s stake in Square at approximately 1.3%.
Class A Shares vs. Class B Shares
When you think of stock, you’re probably thinking of the kind of shares traded on the New York Stock Exchange, and which the public can purchase. But there can be more than one class of stock for a single company, and not all classes have to be publicly traded.
Different classes of shares can have different costs and benefits. For example, with Square, one share of Class A stock gets one vote in shareholder decisions while one share of Class B stock gets ten votes.
Visa currently owns Class B shares, but provisions allow some of those Class B shares to be converted to Class A shares. Converting Square Class B shares to Class A shares would mean that those shares could then be traded on the open market, which the Class B shares cannot.
Where did the 10% number come from?
The widely-reported 10% stake stems from a misunderstanding of Visa’s SEC filing, in which Visa reported ownership of shares. In the filing, Visa indicated that 3.52 million (of its total 4.19 million) shares of Class B stock could be converted into Class A stock. Furthermore, Visa states that would equal 9.99% of the Class A Square stock currently available.
That calculation assumes that no other Class B convertible shareholders convert their stock to Class A. If they did, Visa’s stake would be smaller, as the number of Class A shares would go up. Visa clarified that its fully diluted stake (essentially, its stake if all other options for conversion were exercised) in Square amounts to approximately 1%.
So is Visa buying Square?
Despite what some are claiming, there doesn’t seem to be much evidence indicating that Visa is looking to buy Square. In fact, some experts suggest it may be the exact opposite: that Visa may be preparing to sell its stock in Square. (Disclosing the potential worth of shares converted to Class A may be an indication that Visa is actually preparing for that conversion. In this situation, a primary reason to convert would be that Square’s Class B shares are not publicly traded, while Class A shares are.)
Square is not the only payments company Visa has invested in. In the summer of 2015, the company invested in another industry darling: Stripe. Investments alone don’t necessarily indicate intent to buy out a company.
While the payments industry has seen several acquisitions recently, including Global Payments acquiring Heartland and TSYS purchasing TransFirst, Visa’s involvement with Square has so far stopped at investment. Without more to go on than the fact that Visa owns stake in Square from the company’s early days, it seems premature to assume that Visa is looking to buy Square.