Visa 2010 Annual Report Download - page 86

Table of Contents
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2010
(in millions, except as noted)
The Company issued different classes and series of common stock in the reorganization reflecting the different rights and obligations of the Visa
financial institution members and Visa Europe. Total shares authorized and issued in the reorganization totaled approximately 775 million shares of class B
and class C common stock. A significant portion of the common stock issued to Visa Europe was redeemed in October 2008. See Note 16 —Stockholders'
Equity.
Note 3—Visa Europe
Under the terms of the reorganization, Visa Europe exchanged its ownership interest in Visa International and Inovant for Visa Inc. common stock as
described in Note 2—The Reorganization, a put-call option agreement and a Framework Agreement, as described below.
Visa Europe Put Option Agreement. The Company granted Visa Europe a perpetual put option, which if exercised, will require Visa Inc. to purchase all
of the outstanding shares of capital stock of Visa Europe from its members. The Company is required to purchase the shares of Visa Europe no later than 285
days after exercise of the put option. The put option provides a formula for determining the purchase price of the Visa Europe shares, which, subject to certain
adjustments, applies Visa Inc.'s forward price-to-earnings multiple, or the P/E ratio (as defined in the option agreement), at the time the option is exercised to
Visa Europe's adjusted sustainable income for the forward 12-month period, or the adjusted sustainable income. The calculation of Visa Europe's adjusted
sustainable income under the terms of the put option agreement includes potentially material adjustments for cost synergies and other negotiated items. Upon
exercise, the key inputs to this formula, including Visa Europe's adjusted sustainable income, will be the result of negotiation between the Company and Visa
Europe. The put option provides an arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase price.
At September 30, 2010, the Company revalued the put option, reducing its estimated fair value to approximately $267 million and recorded
corresponding non-cash, other non-operating income of $79 million. This reduction in value was primarily the result of declines in the Company's P/E ratio
during the second half of fiscal 2010 and does not reflect any change in the likelihood that Visa Europe will exercise its option.
While this amount represents the fair value of the put option at September 30, 2010, it does not represent the actual purchase price that the Company
may be required to pay if the option is exercised, which could be several billion dollars or more. The fair value of the put option represents the value of Visa
Europe's option, which under certain conditions, could obligate the Company to purchase its member equity interest for an amount above fair value. While the
put option is in fact non-transferable, its fair value represents the Company's estimate of the amount the Company would be required to pay a third party
market participant to transfer the potential obligation in an orderly transaction at the measurement date.
The fair value of the put option is computed by comparing the estimated strike price, under the terms of the Put agreement, to the estimated fair value of
Visa Europe. The fair value of 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.
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