NetSpend 2013 Annual Report Download - page 76

This fair value measurement is based on significant
inputs that are both observable (Level 2) and non-
observable (Level 3) in the market as defined in
ASC 820. Key assumptions in the ProPay acquisition
include (a) cash flow projections based on market
participant and internal data, (b) a discount rate of
14.0% for the overall Company and a discount rate of
14.5% for the intangible assets, (c) a pre-tax royalty
rate of 1.0% for trade names and technology (d) an
attrition rate of 3.0%- 5.0%, (e) an effective tax rate of
39.0%, and (f) a terminal value based on a long-term
sustainable growth rate of 3.0%.
Key assumptions in the CPAY acquisition include
(a) cash flow projections based on market participant
and internal data, (b) a discount rate of 19.0% for the
overall company and a discount rate of 19.5% for the
intangible assets, (c) a pre-tax royalty rate of 1.0% for
trade names and technology (d) an attrition rate of
25.0%, (e) an effective tax rate of 39.0%, and (f) a
terminal value based on a long-term sustainable
growth rate of 3.0%.
In connection with these acquisitions, TSYS incurred
$1.3 million in acquisition-related costs primarily
related to professional legal, finance, and accounting
costs. These costs were expensed as incurred and are
included in selling, general, and administrative
expenses in the income statement for the year ended
December 31, 2012.
Other
On February 1, 2012, TSYS acquired contract-based
intangible assets in its Merchant Services segment for
$1.7 million. These intangible assets are being
amortized on a straight-line basis over their estimated
useful lives of five years which approximates their
usage.
Redeemable Noncontrolling Interest
The fair value of the noncontrolling interest in CPAY,
owned by a private company, was based on the
actual purchase price paid for the controlling interest
in CPAY. Next adjustments were made for lack of
control and lack of marketability that market
participants would consider when estimating the fair
value of the noncontrolling, non-marketable interest
in CPAY.
In connection with the acquisition of CPAY, the
Company is party to call and put arrangements with
respect to the membership units that represent the
remaining noncontrolling interest of CPAY. The call
arrangement is exercisable by TSYS and the put
arrangement is exercisable by the Seller. The put
arrangement is outside the control of the Company
by requiring the Company to purchase the Seller’s
entire equity interest in CPAY at a put price at fair
market value. The put arrangement is recorded on
the balance sheet and is classified as redeemable
noncontrolling interest outside of permanent equity.
The call and put arrangements for CPAY,
representing 40% of its total outstanding equity
interests, may be exercised at the discretion of TSYS
or the Seller on the second anniversary of the closing
and upon the recurrence of certain other specified
events.
The put option is not currently redeemable, but
redemption is considered probable based upon the
passage of time of the second anniversary date. As
such, the Company has adopted the accounting
policy to accrete changes in the redemption value
over the period from the date of issuance to the
earliest redemption date, which the Company
believes to be one year. If the put option was
redeemable at December 31, 2013, the redemption
value was estimated to be approximately
$39.7 million. The Company did not accrete any
changes to the redemption value as the balance as of
December 31, 2013 exceeded the accretion fair value
amount.
In February 2014, with cash on hand, the Company
purchased an additional 15% equity interest in CPAY,
reducing its redeemable noncontrolling interest in
CPAY to 25%.
2011
On May 2, 2011, TSYS completed its acquisition of all
of the outstanding common stock of TermNet, an
Atlanta-based merchant acquirer, for $42 million in
cash. TermNet provides merchant services to
qualified merchants serving a diverse merchant base
of over 18,000 merchants. The acquisition of
TermNet expands the Company’s presence in the
merchant acquiring industry. The results of
operations for TermNet have been included in the
Company’s results beginning May 2, 2011, and are
included in the Merchant Services segment. The
goodwill of $28.9 million recorded arises largely from
synergies and economies of scale expected to be
realized from combining the operations of TSYS and
TermNet. Goodwill recognized in the acquisition of
TermNet is not deductible for income tax purposes.
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