SQ Block Inc

By Telis Demos and Chelsey Dulaney 

Square Inc. shares rallied Friday after Visa Inc. revealed the size of its investment in the mobile-payments startup subsequent to its initial public offering.

Square, founded and run by Twitter Inc. Chief Executive Jack Dorsey, had announced Visa's investment without disclosing its size in April 2011, when the company was still private.

In a regulatory filing Thursday, Visa said it owns about 4.19 million of Square's Class B shares, which don't trade publicly. But the credit-card company has the option to convert those shares to as much as 3.52 million Class A shares, currently equal to a 9.99% stake in the publicly traded share class.

Visa hasn't bought or sold Square shares since its original investment, a Visa spokeswoman said in an email.

The disclosure of Visa's stake, coming ahead of a regulatory filing deadline, was a balm for a struggling stock.

Shares of San Francisco-based Square have been volatile since an early surge after its IPO in November, as the market tries to figure out how to value a business that blends elements of a financial-services firm and a technology firm. Other so-called fintech companies, such as LendingClub Corp., have been whipsawed in trading since their IPOs.

Visa, which is based in Foster City, Calif., hasn't historically acquired companies like Square, which can act as agents to bring merchants onto the networks of Visa, MasterCard Inc., and other card networks. Still, in a note on Friday, BTIG stock analysts said that the Visa disclosure this week "served as a vote of confidence" in Square's business and "a reminder of [Square's] attractiveness as an acquisition target" as big technology firms build out their electronic-payments capabilities.

Square got its start with a small piece of plastic that plugs into smartphones and lets anyone accept payment via credit or debit cards. Visa first invested in Square in 2011 because it saw the company as a way to help covert small businesses that only accepted cash to accepting credit cards through Square's devices, the companies said at the time.

Visa, meanwhile, has focused more on digital efforts lately as consumers increasingly migrate to electronic payments. The company has launched Visa Digital Solutions, an initiative geared toward secure payments using mobile devices. It also has supported Apple Inc.'s Apple Pay service.

Investors typically convert Class B shares only when they are selling. Should Visa convert its Class B shares of Square into Class A stock, the company would become Square's second-largest holder of Class A shares behind mutual-fund giant Capital Research and Management Co., which has a 12% stake in Square, according to FactSet data.

Visa's filing was a statement of an existing position, known as a 13G; such quarterly filings must be made by next week. Other early Square investors including venture firm Sequoia Capital and J.P. Morgan Chase & Co. also have recently filed 13Gs.

Despite potentially owning nearly 10% of Square's publicly traded shares, Visa's stake only represents about 1% of Square's overall share base. The exact figures of Visa's stake weren't disclosed at the time of Square's IPO.

Square shares rose 7.9% to $9.30 in Friday trading in New York, representing a return on the company's IPO price of $9 per share. Visa shares climbed 2.9% to $70.42.

Square's IPO pricing was well below where the business was valued privately. In first-day trading the stock jumped 45% to over $13. This year, it has fallen 30% and has traded below its IPO price due in part to concerns about the sustainability of the company's growth and global market turmoil.

Greg Bensinger contributed to this article.

Write to Telis Demos at telis.demos@wsj.com and Chelsey Dulaney at Chelsey.Dulaney@wsj.com

(END) Dow Jones Newswires

February 12, 2016 18:39 ET (23:39 GMT)

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