Visa 2014 Annual Report Download - page 73

Probability of exercise—Exercise of the put option is at the sole discretion of Visa Europe (on
behalf of the Visa Europe shareholders pursuant to authority granted to Visa Europe, under its Articles
of Association). We estimate the assumed probability of exercise based on reasonably available
information including, but not limited to: (i) Visa Europe’s stated intentions; (ii) indications that Visa
Europe is preparing to exercise as reflected in its reported financial results; (iii) evaluation of market
conditions, including the regulatory environment, that could impact the potential future profitability of
Visa Europe; and (iv) qualitative factors applicable to Visa Europe’s largest members, which could
indicate a change in their need or desire to liquidate their investment holdings.
P/E differential—The P/E differential is determined by estimating the relative difference in the
forward price-to-earnings multiples applicable to our common stock, as defined in the put option
agreement, and that applicable to Visa Europe at the time of exercise. For valuation purposes, the
forward price-to-earnings multiple applicable to our common stock at the time of exercise is estimated
by evaluating various quantitative measures and qualitative factors. Quantitatively, we estimate our P/E
ratio by dividing the average stock price over the preceding 24 months (the “long-term P/E calculation”)
and the last 30 trading dates (the “30-day P/E calculation”) prior to the measurement date by the
median estimate of our net income per share for the 12 months starting with the next calendar quarter
immediately following the reporting date. This median earnings estimate is obtained from the
Institutional Brokers’ Estimate System. We then determine the best estimate of our long-term price-to-
earnings multiple for valuation purposes by qualitatively evaluating the 30-day P/E calculation as
compared to the long-term P/E calculation. In this evaluation we examine both measures to determine
whether differences, if any, are the result of a fundamental change in our long-term value or the result
of short-term market volatility or other non-Company specific market factors that may not be indicative
of our long-term forward P/E. We believe, given the perpetual nature of the put option, that a market
participant would more heavily weigh long-term value indicators, as opposed to short-term indicators.
Factors that might indicate a fundamental change in long-term value include, but are not limited to,
changes in the regulatory environment, client portfolios, long-term growth rates or new product
innovations. A consistent methodology is applied to a group of comparable public companies used to
estimate the forward price-to-earnings multiple applicable to Visa Europe. These estimates, therefore,
are impacted by changes in stock prices and the financial market’s expectations of our future earnings
and those of comparable companies.
Other estimates of lesser significance include growth rates and foreign currency exchange rates
applied in the calculation of Visa Europe’s adjusted sustainable income. The valuation model assumes
a large range of annual growth rates, reflecting the different economic environments and
circumstances under which Visa Europe could decide to exercise its option. The lowest growth rates
assumed reflect Visa Europe’s current business model as an association, owned by its member banks,
while the highest reflect a successful shift to a for-profit model in anticipation of its exercise. The
scenarios with higher growth rates are assigned a significantly higher probability in the valuation
model, as we believe a market participant would more heavily weigh these scenarios as it is likely that,
should it choose to exercise its option, Visa Europe will seek to maximize the purchase price by
adopting a for-profit business model in advance of exercising the put option. The foreign exchange rate
used to translate Visa Europe’s results from Euros to U.S. dollars reflects a blend of forward exchange
rates observed in the marketplace. The assumed timing of exercise of the put option used in the
various modeled scenarios is not an overly significant assumption in the valuation, as obligations
calculated in later years are more heavily discounted in the calculation of present value.
Impact if actual results differ from assumptions. In the determination of the fair value of the put
option at September 30, 2014, we have assumed a 40% probability of exercise by Visa Europe at
some point in the future and an estimated long-term P/E differential at the time of exercise of
approximately 1.9x. The use of a probability of exercise that is 5% higher than our estimate would have
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