Acquisitions | 9 Months Ended |
Sep. 30, 2013 |
Acquisitions | ' |
Note 10 — Acquisitions |
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Refer to Note 24 of the Company’s audited financial statements for the year ended December 31, 2012, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC, for a discussion regarding acquisitions. |
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On July 1, 2013, TSYS acquired all the outstanding voting stock of NetSpend, which previously operated as a publicly traded company and is a leading provider of GPR prepaid debit and payroll cards and related financial services to underbanked consumers in the U.S. The acquisition complements the Company’s existing presence in the prepaid processing space. The results of the newly acquired business are being reported by TSYS as a new operating segment titled NetSpend. |
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Under terms of the Merger Agreement, TSYS acquired 100 percent ownership of NetSpend for approximately $1.4 billion, including $1.2 billion of cash to shareholders, $70.7 million of cash for payment to holders of stock options and awards, $58.3 million of cash for repayment of NetSpend’s revolving credit facility and $15.6 million in replacement stock options and awards. NetSpend shareholders received $16.00 in cash for each share of NetSpend common stock. There were 1.6 million NetSpend shares held by five shareholders who have asserted appraisal (or dissenters’) rights with respect to their NetSpend shares, for a preliminary value of $25.7 million at $16.00 per share that were not funded at the closing of the acquisition. |
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Under the terms of the Merger Agreement, the Company replaced unvested share-based awards for certain current employees of NetSpend. The following table provides a list of all replacement awards and the estimated fair value of those awards issued in conjunction with the acquisition of NetSpend: |
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| | Number of Shares and | | | Fair Value | | | | | | | | | |
Options Issued | (in millions) | | | | | | | | |
Time-based restricted stock | | | 870,361 | | | $ | 21.5 | | | | | | | | | |
Non-qualified stock options | | | 530,696 | | | | 8.4 | | | | | | | | | |
Incentive stock options | | | 529,452 | | | | 5.3 | | | | | | | | | |
Performance-based restricted stock | | | 87,356 | | | | 2.2 | | | | | | | | | |
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Total | | | 2,017,865 | | | $ | 37.4 | | | | | | | | | |
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The portion of the fair value of the replacement awards related to services provided prior to the business combination was included in the total purchase price. The portion of the fair value associated with future service is recognized as expense over the future service period, which varies by award. The Company determined that $15.6 million ($11.1 million net of tax) of the replacement awards was related to services rendered prior to the business combination. |
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The goodwill amount of $1.0 billion arising from the acquisition consists largely of expansion of customer base, differentiation in market opportunity and economies of scale expected from combining the operations of TSYS and NetSpend. All of the goodwill was assigned to TSYS’ new NetSpend segment. The goodwill recognized is not expected to be deductible for income tax purposes. |
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The following table summarizes the consideration paid for NetSpend and the preliminary recognized amounts of the identifiable assets acquired and liabilities assumed on July 1, 2013 (the acquisition date). These amounts will remain preliminary until the valuation analysis has been finalized. The measurement period during which changes in assets, liabilities, equity interests, or items of consideration are subject to adjustment ends one year following the acquisition date. The Company continues to evaluate consideration paid, deferred taxes, goodwill and financial liabilities. |
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(in thousands) | | | | | | | | | | | | | | | |
Consideration | | | | | | | | | | | | | | | | |
Cash | | $ | 1,355,270 | | | | | | | | | | | | | |
Equity instruments | | | 15,557 | | | | | | | | | | | | | |
Dissenting shareholder liability* | | | 25,723 | | | | | | | | | | | | | |
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Fair value of total consideration transferred | | $ | 1,396,550 | | | | | | | | | | | | | |
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Recognized amounts of identifiable assets acquired and liabilities assumed: | | | | | | | | | | | | | | | | |
Cash | | $ | 40,611 | | | | | | | | | | | | | |
Accounts receivable, net | | | 11,335 | | | | | | | | | | | | | |
Property, equipment and software | | | 11,657 | | | | | | | | | | | | | |
Identifiable intangible assets | | | 480,075 | | | | | | | | | | | | | |
Deferred tax asset | | | 10,165 | | | | | | | | | | | | | |
Other assets | | | 33,626 | | | | | | | | | | | | | |
Deferred tax liability | | | (155,945 | ) | | | | | | | | | | | | |
Financial liabilities | | | (62,452 | ) | | | | | | | | | | | | |
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Total identifiable net assets | | | 369,072 | | | | | | | | | | | | | |
Goodwill | | | 1,027,478 | | | | | | | | | | | | | |
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| | $ | 1,396,550 | | | | | | | | | | | | | |
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* | Represents 1.6 million NetSpend shares held by dissenting shareholders | | | | | | | | | | | | | | | |
Identifiable intangible assets acquired in the NetSpend acquisition include channel relationships, current technology, a prospect database, the NetSpend trade name and non-compete agreements. |
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The identifiable intangible assets had no significant estimated residual value. These intangible assets are being amortized over their estimated useful lives of five to eight years based on the pattern of expected future economic benefit, which approximates a straight-line basis over the useful lives of the assets. The fair value of the acquired identifiable intangible assets of $480.1 million was estimated using the income approach (discounted cash flow and relief from royalty methods) and cost approach. The fair values and useful lives of the identified intangible assets were primarily determined using forecasted cash flows, which included estimates for certain assumptions such as revenues, expenses, attrition rates and royalty rates. The estimated fair value of identifiable intangible assets acquired in the acquisitions and the related estimated weighted average useful lives are as follows: |
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(in millions) | | Fair Value | | | Weighted Average | | | | | | | | | |
Useful Life | | | | | | | | |
(in years) | | | | | | | | |
Channel relationships | | $ | 317.9 | | | | 8 | | | | | | | | | |
Covenants-not-to-compete | | | 11.5 | | | | 6 | | | | | | | | | |
Current technology | | | 78.7 | | | | 7 | | | | | | | | | |
Database | | | 28 | | | | 5 | | | | | | | | | |
Trade name | | | 44 | | | | 5 | | | | | | | | | |
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Total acquired identifiable intangible assets | | $ | 480.1 | | | | 7.3 | | | | | | | | | |
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The fair value measurement of the identifiable intangible assets represents Level 2 and Level 3 measurements as defined in ASC 820. Key assumptions include (a) cash flow projections based on market participant and internal data, (b) a discount rate of 11%, (c) a pre-tax royalty rate range of 2.5-7.0%, (d) attrition rates of 5%-40%, (e) an effective tax rate of 40%, and (f) a terminal value based on a long-term sustainable growth rate of 3%. |
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In connection with the acquisition, TSYS incurred $12.0 million in acquisition-related costs primarily related to professional legal, finance, and accounting costs. These costs were expensed as incurred and are included in merger and acquisition expenses on the income statement for the nine months ended September 30, 2013. |
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Pro Forma Result of Operations |
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The amounts of NetSpend revenue and earnings included in TSYS’ consolidated income statement for the three and nine months ended September 30, 2013, and the pro forma revenue and earnings of the combined entity had the acquisition date been January 1, 2012 are: |
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| | Actual | | | Supplemental pro forma | |
| | Three months ended | | | Three months ended | |
September 30, | September 30, |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
(in thousands, except per share data) | | | | | | | | | | | | |
Revenue | | $ | 588,074 | | | | 468,059 | | | | 588,074 | | | | 552,952 | |
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Net income attributable to TSYS common shareholders | | $ | 64,350 | | | | 60,312 | | | | 68,935 | | | | 47,085 | |
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Basic EPS attributable to TSYS common shareholders | | $ | 0.34 | | | | 0.32 | | | | 0.37 | | | | 0.25 | |
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Diluted EPS attributable to TSYS common shareholders | | $ | 0.34 | | | | 0.32 | | | | 0.36 | | | | 0.25 | |
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| | Actual | | | Supplemental pro forma | |
| | Nine months ended | | | Nine months ended | |
September 30, | September 30, |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
(in thousands, except per share data) | | | | | | | | | | | | |
Revenue | | $ | 1,531,513 | | | | 1,391,872 | | | | 1,753,556 | | | | 1,653,257 | |
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Net income attributable to TSYS common shareholders | | $ | 179,095 | | | | 183,418 | | | | 182,668 | | | | 139,951 | |
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Basic EPS attributable to TSYS common shareholders | | $ | 0.95 | | | | 0.97 | | | | 0.97 | | | | 0.74 | |
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Diluted EPS attributable to TSYS common shareholders | | $ | 0.94 | | | | 0.97 | | | | 0.95 | | | | 0.73 | |
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The unaudited pro forma financial information presented above does not purport to represent what the actual results of our operations would have been if the acquisition of NetSpend’s operations had occurred prior to January 1, 2012, nor is it indicative of the future operating results of TSYS. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, including, but not limited to, anticipated cost savings from operating synergies. |
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The unaudited pro forma financial information presented in the table above has been adjusted to give effect to adjustments that are (1) directly related to the business combination; (2) factually supportable; and (3) expected to have a continuing impact. These adjustments include, but are not limited to, the application of accounting policies; and depreciation and amortization related to fair value adjustments to property, plant and equipment and intangible assets. |
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The pro forma adjustments do not reflect the following material items that result directly from the acquisition and which impacted our statement of operations following the acquisition: |
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| • | | Acquisition and related financing transaction costs relating to fees to investment bankers, attorneys, accountants, and other professional advisors, and other transaction-related costs that were not capitalized as deferred financing costs; and | | | | | | | | | | | | | |
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| • | | The effect of anticipated cost savings or operating efficiencies expected to be realized and related restructuring charges such as technology and infrastructure integration expenses, and other costs related to the integration of NetSpend into TSYS. | | | | | | | | | | | | | |