Visa 2013 Annual Report Download - page 62

Upon exercise, the key inputs to this formula, including Visa Europe’s adjusted sustainable
income, will be the result of negotiation between us 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. See Note 2—Visa Europe to our consolidated financial statements for further detail regarding the
calculation of the put exercise price under the agreement.
The fair value of Visa Europe’s option was estimated to be approximately $145 million at
September 30, 2013. While the put option is in fact non-transferable, this amount, recorded in our
financial statements, represents our estimate of the amount we would be required to pay a third-party
market participant to transfer the potential obligation in an orderly transaction. 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.
While this amount represents the fair value of the put option at September 30, 2013, it does not
represent the actual purchase price that we may be required to pay if the option is exercised, which
could be several billion dollars or more. 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 put option
are the assumed probability that Visa Europe will elect to exercise its option and the estimated
differential between the forward price-to-earnings multiple applicable to our common stock, as defined
in the 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 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.
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