Visa 2015 Annual Report Download - page 71

Visa Europe is defined as the estimated amount a third-party market participant might pay in an arm’s
length transaction under normal business conditions. A probability of exercise assumption is applied to
reflect the possibility that Visa Europe will never exercise its option in its unamended form.
While this amount represents the fair value of the unamended put option at September 30, 2015, it
does not represent the actual purchase price that we may be required to pay if the unamended option
is exercised. Given current economic conditions, the purchase price under the unamended terms of the
put option would likely be in excess of $15 billion. See the Liquidity and Capital Resources section of
Management’s Discussion and Analysis of Financial Condition and Results of Operations for further
discussion.
Assumptions and judgment. The most significant estimates used in the valuation of the
unamended put option are the assumed probability that Visa Europe will elect to exercise its option in
its unamended form, and the estimated differential between the forward price-to-earnings multiple
applicable to our common stock, as defined in the unamended put option agreement, and that
applicable to Visa Europe on a stand-alone basis at the time of exercise, which we refer to as the P/E
differential.
Probability of exercise—Exercise of the unamended put option is at the sole discretion of Visa
Europe (on behalf of the Visa Europe shareholders pursuant to authority granted to Visa Europe,
including under its Articles of Association). We estimate the assumed probability of exercise based on
the unamended terms of the put option agreement and other reasonably available information
including, but not limited to: (i) Visa Europe’s stated intentions (if any) to exercise the put option in its
unamended form; (ii) evaluation of market conditions, including the regulatory environment, that could
impact the potential future profitability of Visa Europe; and (iii) other qualitative factors including, but
not limited to, qualitative factors related 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 unamended 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 unamended 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.
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