| Acquisition | NOTE 4. ACQUISITION USAA AMCO Acquisition On July 1, 2019, the Company completed the acquisition of USAA Adviser and VCTA (collectively, the “USAA Acquired Companies”), which includes the USAA Mutual Fund Business, and executed Amendment No. 1 (the “Amendment”) to the stock purchase agreement (the “Stock Purchase Agreement”). The Amendment amended the Stock Purchase Agreement entered into on November 6, 2018 between the Company, USAA Investment Corporation, and for certain limited purposes, USAA Capital Corporation. The assets acquired and liabilities assumed and results of the USAA Mutual Fund Business are reflected in the consolidated financial statements from the closing date of July 1, 2019. The USAA AMCO Acquisition expanded and diversified the Company’s investment platform, particularly in the fixed income and solutions asset classes, and increased the Company’s size and scale. Additional products added to the investments platform include target date and target risk strategies, managed volatility mutual funds, active fixed income ETFs, sub-advised and multi-manager equity funds. The acquisition also added to the Company’s lineup of asset allocation portfolios and smart beta equity ETFs and provided the Company the rights to offer products and services using the USAA brand and the opportunity to offer its products to USAA members through a direct investor channel. Purchase Price The Company purchased 100% of the outstanding common stock of the USAA Acquired Companies. The purchase price for the USAA Acquired Companies was $949.4 million, comprised of $851.3 million of cash paid at closing plus the acquisition date value of contingent payments due to sellers of $98.8 million less $0.7 million in net working capital adjustments settled in the first quarter of 2020. No further purchase price adjustments were recorded during the measurement period. A maximum of $150.0 million ($37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four annual earn out periods following the closing as defined in the Stock Purchase Agreement. To receive any contingent payment in respect of “non-managed money”-related assets for a given year, annual revenue from “non-managed money”-related assets must be at least 80% of the revenue run-rate (as calculated under the Stock Purchase Agreement) of the USAA Adviser’s “non-managed money”-related assets under management as of the Closing, and to achieve the maximum contingent payment for a given year, such annual revenue must total at least 100% of that Closing revenue run-rate. Annual contingent payments in respect of “non-managed money”-related assets are subject to certain “catch-up” provisions set forth in the USAA Stock Purchase Agreement. The Company accounted for the acquisition in accordance with ASC 805, Business Combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the USAA AMCO Acquisition. The Company used an independent valuation specialist to assist with the determination of fair value for certain of the acquired assets and assumed liabilities disclosed below. The excess purchase price over the estimated fair values of assets acquired and liabilities assumed of $120.6 million was recorded to goodwill in the Consolidated Balance Sheets, all of which is expected to be deductible for tax purposes. The goodwill arising from the acquisition primarily resulted from expected future earnings and cash flows, as well as the expected synergies created by the integration of the USAA Acquired Companies within our organization. The following table presents the estimated amounts of assets acquired and liabilities assumed as of the acquisition date:
(in thousands)
Cash and cash equivalents
$
17,473
Investment management fees receivable
25,353
Fund administration and distribution fees receivable
4,779
Other receivables and prepaid expenses
299
Property and equipment
1,165
Other intangible assets ( 1)
808,670
Goodwill
120,643
Accounts payable and accrued expenses
(5,575
)
Accrued compensation and benefits
(5,907
)
Payable to members and custodians
(17,473
)
Purchase price
$
949,427
(1)
Includes $750.2 million for indefinite-lived investment advisory contracts, $19.1 million for indefinite-lived transfer agent contracts, $0.8 million for indefinite-lived distribution contracts, $38.2 million for definite-lived trade name assets and $0.4 million for definite-lived lease-related assets, all of which are recorded in other intangible assets, net on the Consolidated Balance Sheets. Contingent Consideration The estimated fair value for contingent consideration payable to sellers is estimated using the real options method. Revenue related to “non-managed money” assets is simulated in a risk-neutral framework to calculate expected probability-weighted earn out payments, which are then discounted from the expected payment dates at the relevant cost of debt. Significant assumptions and inputs include the “non-managed money” revenue projected annual growth rate, the market price of risk, which adjusts the projected revenue growth rate to a risk-neutral expected growth rate, revenue volatility and discount rate. The market price of risk and revenue volatility are based on data for comparable companies. As the contingent consideration represents a subordinate, unsecured claim of the Company, the Company assesses a discount rate which incorporates adjustments for credit risk and the subordination of the contingent consideration. The fair value of contingent consideration payable to sellers was estimated at $68.8 million and $92.5 million at December 31, 2021 and 2020, respectively, and $98.8 million as of the acquisition date. The Company recognized expense of $13.8 million, $11.3 million and $19.9 million in 2021, 2020 and 2019, respectively, which was recorded in change in value of consideration payable for acquisition of business in the Consolidated Statements of Operations. As of December 31, 2021, the Company has paid a total of $75.0 million (the $37.5 million maximum payment for each of the first and second earn out periods) in contingent consideration to sellers. Significant inputs to the valuation of contingent consideration payable to sellers as of December 31, 2021 and 2020 and the acquisition date are as follows and are approximate values:
December 31, 2021
December 31, 2020
July 1, 2019 Acquisition Date
Non-managed money revenue average annual growth rate
5
%
3
%
3
%
Market price of risk (continuous)
6
%
7
%
4
%
Revenue volatility
17
%
16
%
20
%
Discount rate
3
%
3
%
7
%
Years remaining in earn out period
1.9
2.9
4.3
Undiscounted estimated remaining earn out payments $ millions
$72 - $75
$98 - $113
$119 - $150
USAA Acquired Companies Revenue of the USAA Acquired Companies subsequent to the effective closing date of July 1, 2019 for the six months ended December 31, 2019 and the six months ended June 30, 2020, was as follows:
Unaudited
Unaudited
Six Months Ended
Six Months Ended
(in millions)
June 30, 2020
December 31, 2019
Revenue
$
221.3
$
244.5 Net income attributable to the USAA Acquired Companies for the six months ended December 31, 2019 and the first six months of 2020 is impractical to determine as the Company does not prepare discrete financial information at that level. The Company’s consolidated financial statements for the year ended December 31, 2019 include the operating results of the USAA Acquired Companies for the period from July 1, 2019 to December 31, 2019. The historical consolidated financial information of Victory and the USAA Acquired Companies have been adjusted to give effect to unaudited pro forma events that are directly attributable to the transaction, factually supportable and expected to have continuing impact on the combined results. These amounts have been calculated after adjusting the results of the USAA Acquired Companies to reflect additional interest expense, distribution costs, share-based compensation expense, income taxes and intangible asset amortization that would have been expensed assuming the fair value adjustments had been applied on January 1, 2018. In addition, Victory’s and the USAA Acquired Companies’ results were adjusted to remove incentive compensation, legal fees and mutual fund proxy costs directly attributable to the acquisition. The following Unaudited Pro Forma Condensed Combined Statements of Operations are provided for illustrative purposes only and assume that the acquisition occurred on January 1, 2018. This unaudited information should not be relied upon as indicative of historical results that would have been obtained if the acquisition had occurred on that date, nor of the results that may be obtained in the future.
Unaudited
Twelve Months Ended December 31,
(in thousands, except per share amount)
2019
2018
Revenue
$
851,440
$
906,844
Net income
114,988
71,471
Earnings per share of common stock
Basic
$
1.70
$
1.08
Diluted
$
1.56
$
1.01
Weighted average number of shares outstanding
Basic
67,693
66,295
Diluted
73,612
70,511
THB Acquisition On March 1, 2021, the Company completed the acquisition of certain assets of THB, including without limitation, (i) certain investment advisory and business contracts, (ii) certain books and records, (iii) the investment performance track record, and (iv) all business intellectual property and proprietary software, and hired the THB investment team. At March 1, 2021, the THB AUM that was acquired totaled $547 million. THB manages responsible investment portfolios in the micro-cap, small-cap and mid-cap asset classes, including U.S., global and international strategies. Because substantially all of the fair value of the acquired assets was concentrated in a single identifiable asset, the transaction was accounted for as an asset acquisition. Estimated acquisition costs of $0.6 million were allocated to a definite-lived customer relationship intangible asset. NEC Acquisition On September 10, 2021, VCM entered into a definitive agreement to acquire 100% of the equity interests in NEC. Founded in 2004 and based in Hanover, New Hampshire, NEC is an alternative asset management firm focused on debt and equity investments in clean energy infrastructure projects and companies through four active private closed-end funds (the “NEC Funds”). On November 1, 2021 (the “NEC Closing Date”), the acquisition of NEC was completed. The estimated purchase price for the NEC Acquisition is $63.1 million, which includes $62.8 million in cash paid at closing, net of cash acquired, and $0.3 million of net working capital adjustments to be settled in the first half of 2022. Consideration paid at closing was funded with balance sheet cash and proceeds from borrowings under the Company’s revolving line of credit. All borrowings under the revolving line of credit were repaid prior to December 31, 2021. Under the terms of the purchase agreement, the Company will pay up to an additional $35.0 million in cash based on net revenue growth over a six year period following the closing date. The purchase agreement specifies net revenue and payment targets for the 36-month, 48-month and 60-month periods beginning on November 30, 2021 (the “Start Date”) for the contingent payments. It also provides for advance payments and catch-up payments to be made based on actual NEC net management fee revenue, as defined in the purchase agreement, as measured at the end of each 12 month anniversary of the Start Date over a six year period. The maximum amount of contingent payments is due, less any contingent payments previously paid, upon the occurrence of certain specified events within a five year period following the Start Date. The Company determined that substantially all of the contingent payments payable per the NEC purchase agreement represent compensation for post-closing services. Accordingly, these contingent payments were excluded from the purchase price for the NEC Acquisition and a liability for these contingent payments was not recorded on the acquisition date. The Company will recognize compensation expense over the estimated service period on a straight-line basis in an amount equal to the total contingent payments currently forecasted to be paid. As of December 31, 2021, the Company had recorded $1.1 million in NEC contingent payment compensation expense, which is included in personnel compensation and benefits in the Consolidated Statements of Operations. A liability for the corresponding amount is recorded in accrued compensation and benefits in the Consolidated Balance Sheets. The NEC Acquisition purchase price of $62.8 million was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. The Company used an independent valuation specialist to assist with the determination of fair value for certain of the acquired assets and assumed liabilities disclosed below. The carried interests in the existing NEC Funds were not acquired in the transaction. The excess purchase price over the estimated fair values of assets acquired and liabilities assumed of $41.0 million was recorded to goodwill in the Consolidated Balance Sheets, all of which is expected to be deductible for tax purposes. The goodwill arising from the acquisition primarily results from future earnings and cash flows from new funds expected to be launched on the NEC alternative investment platform. The following table presents the estimated amounts of assets acquired and liabilities assumed as of the acquisition date, net of cash acquired:
(in thousands)
Investment management fees receivable
$
118
Other receivables and prepaid expenses
60
Property and equipment
19
Other intangible assets (1)
23,700
Goodwill
41,032
Accounts payable and accrued expenses
(2,096
)
Purchase price, net of cash acquired
$
62,833
(1)
Includes $14.0 million for definite-lived customer relationships with a 6 year estimated useful life and $9.7 million for definite-lived investment advisory contracts with a 2 year estimated useful life, which are recorded in other intangible assets, net on the Consolidated Balance Sheets. As of December 31, 2021, the purchase price allocation for the NEC Acquisition is preliminary as customary post-closing purchase adjustments have not been finalized. The final purchase price allocation may reflect changes to the preliminary valuations for accounts payable and accrued expenses and other liabilities for net working capital adjustments. Adjustments will be made, as necessary, during the measurement period of up to one year after the closing date. WestEnd Acquisition On November 4, 2021, the Company entered into a definitive agreement (the “WestEnd Purchase Agreement”) with WestEnd Advisors, LLC (“WestEnd”), pursuant to which the Company agreed to purchase 100% of the equity interests of WestEnd (the “WestEnd Acquisition”) on the terms and subject to the conditions therein. Founded in 2004, and headquartered in Charlotte, North Carolina, WestEnd is an ETF strategist advisor that provides financial advisors with a turnkey, core model allocation strategy for either a holistic solution or complementary source of alpha. The firm offers four primary ETF strategies and one large cap core strategy in Separately Managed Account (SMA) structures. On and effective December 31, 2021, the Company completed the WestEnd Acquisition. The aggregate purchase price (the “WestEnd Purchase Price”) for the WestEnd Acquisition is estimated at $716.1 million, net of cash acquired, which includes (i) $475.8 million in cash paid at closing (the “WestEnd Closing”) net of cash acquired, plus the acquisition date value of contingent payments due to sellers of $239.7 million plus an estimated $0.6 million payable in cash in the first half of 2022 for net working capital adjustments. The contingent earn-out payments are based on net revenue of the WestEnd business during each of the first four years following the WestEnd Closing, subject to certain “catch-up” provisions over a five and one half year period following the WestEnd Closing. A maximum of $320.0 million ($80.0 million per year) in earn-out payments may be paid. The WestEnd Purchase Price is subject to adjustments based on the level of client consents received, net working capital, debt, cash and unpaid transaction expenses. In connection with the closing of the WestEnd Acquisition, the Company entered into the Third Amendment to the 2019 Credit Agreement and obtained incremental term loans in an aggregate principal amount of $505.0 million to fund the acquisition and pay fees and expenses related to the transaction. Please refer to Note 11, Debt, for more information on the 2021 Incremental Term Loans. A total of $2.9 million of the cash paid at closing was placed in escrow, of which $0.5 million is available for purchase price adjustments and $2.4 million is available to compensate the Company for eligible claims under the purchase agreement’s indemnification provisions. The purchase price of $716.1 million was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the WestEnd Acquisition. The Company used an independent valuation specialist to assist with the determination of fair value for certain of the acquired assets and assumed liabilities disclosed below. The excess purchase price over the estimated fair values of assets acquired and liabilities assumed of $536.0 million was recorded to goodwill in the Consolidated Balance Sheets, all of which is expected to be deductible for tax purposes. The goodwill arising from the acquisition primarily results from revenue synergies expected from combining WestEnd and Victory distribution platforms and sales efforts. The following table presents the estimated amounts of assets acquired and liabilities assumed as of the acquisition date, net of cash acquired:
(in thousands)
Investment management fees receivable
$
4,560
Prepaid expenses and other assets
256
Property and equipment
2,011
Other intangible assets (1)
175,500
Goodwill
536,023
Accounts payable and accrued expenses
(115
)
Accrued compensation and benefits
(1,480
)
Other liabilities
(693
)
Purchase price, net of cash acquired
$
716,062
(1)
Includes $172.5 million for definite-lived customer relationship assets with a 10 year estimated useful life and $3.0 million for a definite-lived trade name asset with a 7 year estimated useful life, which are recorded in other intangible assets, net on the Consolidated Balance Sheets. As of December 31, 2021, the purchase price allocation for the WestEnd Acquisition is preliminary as customary post-closing purchase adjustments have not been finalized. The final purchase price allocation may reflect changes to the preliminary valuations for receivables and accounts payable and accrued expenses for net working capital adjustments. Adjustments will be made, as necessary, during the measurement period of up to one year after the closing date. The estimated fair value for contingent consideration payable to sellers is estimated using the real options method. WestEnd net revenue growth is simulated in a risk-neutral framework to calculate expected probability-weighted earn out payments, which are then discounted from the expected payment dates at the relevant cost of debt. Significant assumptions and inputs include the WestEnd net revenue projected annual growth rate, the market price of risk, which adjusts the projected revenue growth rate to a risk-neutral expected growth rate, revenue volatility and discount rate. The market price of risk and revenue volatility are based on data for comparable companies. As the contingent consideration represents a subordinate, unsecured claim of the Company, the Company assesses a discount rate which incorporates adjustments for credit risk and the subordination of the contingent consideration. A maximum of $320.0 million ($80.0 million per year) is payable to sellers in contingent payments. The fair value of contingent consideration payable to sellers was estimated at $239.7 million as of the acquisition date. Significant inputs to the valuation of contingent consideration payable to sellers as of December 31, 2021 are as follows and are approximate values:
December 31, 2021
Acquisition Date
Net revenue average annual growth rate
37
%
Market price of risk adjustment for revenue (continuous)
11
%
Revenue volatility
21
%
Discount rate
4
%
Years remaining in earn out period
5.8
Undiscounted estimated remaining earn out payments $ millions
$277 - $320
As the WestEnd Acquisition was effective at market close on December 31, 2021, the Company’s operating results for 2021 do not include WestEnd. The following Unaudited Pro Forma Condensed Combined Statements of Operations are provided for illustrative purposes only and assume that the acquisition occurred on January 1, 2020. This unaudited information should not be relied upon as indicative of historical results that would have been obtained if the acquisition had occurred on that date, nor of the results that may be obtained in the future. The historical consolidated financial information of the Company and WestEnd have been adjusted to give effect to unaudited pro forma events that are directly attributable to the WestEnd Acquisition. These amounts have been calculated after adjusting the results of WestEnd and the Company to reflect additional interest expense, intangible asset amortization, acquisition-related costs, transaction-related compensation costs and income taxes that would have been expensed assuming the WestEnd Acquisition was consummated on January 1, 2020.
Unaudited
Year Ended December 31,
(in thousands, except per share amount)
2021
2020
Revenue
$
936,609
$
798,401
Net income
280,980
177,637
Earnings per share of common stock
Basic
$
4.13
$
2.62
Diluted
$
3.79
$
2.41
Weighted average number of shares outstanding
Basic
67,976
67,710
Diluted
74,151
73,719
Acquisition-related costs Costs related to acquisitions of businesses and assets are summarized below and include legal and filing fees, advisory services, mutual fund proxy voting costs and other one‑time expenses related to the transactions. Included in USAA AMCO acquisition-related costs in 2021 is a liability for one-time payments for assets not acquired in the transaction. Costs related to acquisitions were expensed in 2021, 2020 and 2019 and are included in acquisition‑related costs in the Consolidated Statements of Operations.
Acquisition-related costs
(in thousands)
2021
2020
2019
USAA AMCO
$
5,534
$
426
$
21,333
NEC
2,605
-
-
WestEnd
8,102
-
-
Other
21
682
984
Total acquisition-related costs
$
16,262
$
1,108
$
22,317
Restructuring and Integration Costs In connection with business combinations, asset purchases and changes in business strategy, the Company incurs costs integrating investment platforms, products and personnel into existing systems, processes and service provider arrangements and restructuring the business to capture operating expense synergies. The following table presents a rollforward of restructuring and integration liabilities:
(in millions)
2021
2020
2019
Liability balance, beginning of period
$
1.0
$
3.0
$
0.1
Severance expense
USAA AMCO Acquisition
1.4
1.2
6.2
THB
0.2
—
—
Other
0.2
—
—
Contract termination expense
USAA AMCO Acquisition
—
0.1
0.2
Integration costs
USAA AMCO Acquisition
0.5
6.5
2.3
THB
0.3
Restructuring and integration costs
2.6
7.8
8.7
Settlement of liabilities
(3.3
)
(9.8
)
(5.8
)
Liability balance, end of period
$
0.3
$
1.0
$
3.0
Accrued expenses
$
0.3
$
1.0
$
2.9
Other liabilities
—
—
0.1
Liability balance, end of period
$
0.3
$
1.0
$
3.0 |
