McKesson 2008 Annual Report Download - page 46

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
39
Approximately $1,258 million of the purchase price allocation has been assigned to goodwill. Included in the
purchase price allocation are acquired identifiable intangibles of $402 million representing customer
relationships with a weighted-average life of 10 years, developed technology of $56 million with a weighted-
average life of 5 years, and trademark and trade names of $13 million with a weighted-average life of 5 years.
In connection with the purchase price allocation, we have estimated the fair value of the support obligations
assumed from Per-Se in connection with the acquisition. The estimated fair value of these obligations was
determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating
the costs relating to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating
profit approximates, in theory, the amount that we would be required to pay a third party to assume these
obligations. As a result, in allocating the purchase price, we recorded an adjustment to reduce the carrying
value of Per-Se’ s deferred revenue by $17 million to $30 million, which represents our estimate of the fair value
of the obligation assumed.
−Our Technology Solutions segment acquired RelayHealth Corporation (“RelayHealth”) based in Emeryville,
California. RelayHealth is a provider of secure online healthcare communication services linking patients,
healthcare professionals, payors and pharmacies. This segment also acquired two other entities, one
specializing in patient billing solutions designed to simplify and enhance healthcare providers’ financial
interactions with their patients and the other a provider of integrated software for electronic health records,
medical billing and appointment scheduling for independent physician practices. The total cost of these three
entities was $90 million, which was paid in cash. Goodwill recognized in these transactions amounted to $63
million.
−Our Distribution Solutions segment acquired Sterling, which is based in Moorestown, New Jersey. Sterling is a
national provider and distributor of disposable medical supplies, health management services and quality
management programs to the home care market. This segment also acquired a medical supply sourcing agent.
The total cost of these two entities was $95 million, which was paid in cash. Goodwill recognized in these
transactions amounted to $47 million.
−We contributed $36 million in cash and $45 million in net assets primarily from our Automated Prescription
Systems business to Parata, in exchange for a significant minority interest in Parata. Parata is a manufacturer of
pharmacy robotic equipment. In connection with the investment, we abandoned certain assets which resulted in
a $15 million charge to cost of sales and we incurred $6 million of other expenses related to the transaction
which were recorded within operating expenses. We did not recognize any additional gains or losses as a result
of this transaction as we believe the fair value of our investment in Parata approximates the carrying value of
consideration contributed to Parata. Our investment in Parata is accounted for under the equity method of
accounting within our Distribution Solutions segment.
In 2006, we made the following acquisitions:
−We acquired substantially all of the issued and outstanding stock of D&K of St. Louis, Missouri for an
aggregate cash purchase price of $479 million, including the assumption of D&K’ s debt. D&K is primarily a
wholesale distributor of branded and generic pharmaceuticals and over-the-counter health and beauty products
to independent and regional pharmacies, primarily in the Midwest. The acquisition of D&K expanded our
existing U.S. pharmaceutical distribution business. Approximately $158 million of the purchase price was
assigned to goodwill. Included in the purchase price were acquired identifiable intangibles of $43 million
primarily representing customer lists and not-to-compete covenants which have an estimated weighted-average
useful life of nine years. Financial results for D&K are included within our Distribution Solutions segment.