Discover 2011 Annual Report Download - page 112

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the annual servicing fee the Company received based on a percentage of the investor interest outstanding. The Company did not
recognize servicing assets or servicing liabilities for servicing rights since the servicing fee approximated adequate
compensation to the Company for performing the servicing. In addition, the Company, in accordance with governing
securitization documents, allocated portions of discount and interchange revenue to all credit card securitization transactions,
which was also recognized as securitization income. Securitization transaction costs were deferred and amortized to
securitization income over the life of the related transactions.
4. Business Combinations
Acquisition of The Student Loan Corporation. On December 31, 2010, the Company acquired The Student Loan
Corporation (“SLC”), which is now a wholly-owned subsidiary of Discover Bank and included in the Company’s Direct
Banking segment. The Company acquired SLC’s ongoing private student loan business, which includes certain private student
loans held in three securitization trusts and other assets, and assumed SLC’s asset-backed securitization debt incurred by those
trusts and other liabilities. The acquired loans are considered to be purchased credit-impaired loans for accounting purposes, the
details of which are discussed further in Note 6: Loan Receivables. The acquisition significantly increased the size of the
Company’s private student loan portfolio. In addition, the acquisition has provided the Company with a developed student loan
business platform, additional school relationships and SLC’s website. Since the acquisition date, the results of operations and
cash flows of SLC have been included in the Company’s consolidated results of operations and cash flows. Pro forma data is
not provided as the impact of the SLC acquisition was not significant to the Company’s consolidated results of operations or
cash flows.
Net cash consideration paid. The following table provides a calculation of the amount paid by the Company for SLC
based on the net assets of the SLC securitization trusts acquired after applying an 8.5% discount to the trust assets (the “Trust
Certificate Purchase Price”) (dollars in millions):
Gross trust assets
Less: 8.5% discount
Net trust assets
Less: Principal amount of and accrued interest on trust debt
Trust Certificate Purchase Price
Actual
$ 3,977
(338)
3,639
(3,193)
$ 446
Estimate at
Closing
December 31,
2010
$ 3,993
(339)
3,654
(3,215)
$ 439
Although the Company paid SLC shareholders $600 million for the acquisition of SLC (“Aggregate Merger
Consideration”), the Company received a purchase price adjustment from Citibank, N.A. (“Citibank”) equivalent to the amount
by which the Aggregate Merger Consideration exceeded the value of the Trust Certificate Purchase Price. In addition, Citibank
agreed to adjust the cash consideration paid by the Company to compensate it for (i) agreeing to commute certain insurance
policies covering certain of the loans acquired and (ii) for the value of non-trust related liabilities assumed by the Company.
The following table provides a summary of total consideration paid by Discover at the closing of the acquisition on
December 31, 2010 and a summary of the consideration revised for post-closing adjustments (dollars in millions):
Aggregate Merger Consideration
Less: Purchase price adjustment(1)
Trust Certificate Purchase Price
Less: Further adjustments provided for by Citibank
Cash received for consent to insurance commutation
Cash received related to reimbursable liabilities(1)
Net cash consideration paid(1)
Actual
$ 600
(154)
446
(16)
(29)
$ 401
Estimate at
Closing
December 31,
2010
$ 600
(161)
439
(16)
(57)
$ 366
(1) Based on the final SLC closing balance sheet, the Company accrued a $35 million liability, at the end of the first quarter of fiscal 2011, payable to
Citibank for post-closing adjustments arising from a $7 million increase in the Trust Certificate Purchase Price and a $28 million reduction in
reimbursable liabilities, which together resulted in the difference between the actual and estimated numbers shown. The accrued amount was paid to
Citibank during the second quarter of 2011.
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