BUSINESS COMBINATIONS

Stream Acquisition

Background and Financing

On January 6, 2014, the Company and its wholly-owned subsidiary (Merger Sub), entered into an Agreement and Plan of Merger (the "Merger Agreement") with Stream and, for limited purposes, other Sellers listed in the Merger Agreement. On March 3, 2014, Merger Sub was merged with and into Stream (the Merger), with Stream continuing as the surviving corporation and as a wholly owned subsidiary of Convergys. At the time of the Merger, each share of Stream common stock was converted into the right to receive an amount in cash, without interest.

The total purchase price, net of cash acquired, was $804.5, which was funded using available cash, borrowings under the Accounts Receivable Securitization Facility and proceeds from a term loan under the February 28, 2014 Credit Agreement (the Credit Agreement). The Credit Agreement consists of a term loan in the amount of $350.0 and a revolving credit facility in the amount of $300.0 (see Note 9, "Debt and Capital Lease Obligations" for the definition of these terms and further discussion).

The preliminary purchase price of Stream consisted of the following items:



Cash consideration for Stream stock ⁽¹⁾	$	482.9
Cash consideration for Stream stock options ⁽²⁾	16.1
Cash consideration for repayment of Stream 11.25% Senior Secured Notes ⁽³⁾	243.0
Cash consideration for repayment of Stream 10.0% Promissory Notes ⁽⁴⁾	19.3
Cash consideration for repayment of Stream Revolving Credit Facility ⁽⁵⁾	63.4
Cash consideration for transaction expenses of Stream ⁽⁶⁾	7.8
Total cash consideration	832.5
Cash acquired ⁽⁷⁾	(28.0		)
Net consideration transferred	$	804.5


(1)	The cash consideration for the outstanding shares of Stream's common stock, which includes a preliminary estimate for future working capital settlement. Stream outstanding common shares totaled 0.7 as of March 3, 2014.


(2)	The cash consideration paid per share of "in the money" stock option awards.


(3)	The cash consideration to repay Stream's 11.25% Senior Secured Notes due 2014, which reflects the aggregate principal and interest amounts of $230.0 and $13.0, respectively, as of March 3, 2014.


(4)	The cash consideration to repay Stream's 10.0% Promissory Notes, which reflects the aggregate principal and interest amounts of $16.1 and $3.2, respectively, as of March 3, 2014.


(5)	The cash consideration to repay Stream's Revolving Credit Facility, which reflects the aggregate principal and interest amounts of $63.1 and $0.3, respectively, as of March 3, 2014.


(6)	Pursuant to the Merger Agreement, Convergys reimbursed the holders of Stream common stock for expenses incurred by Stream in connection with the merger. These expenses primarily related to third-party consulting services.


(7)	Represents the Stream cash balance acquired at acquisition.

The Company incurred $14.7 of direct transaction costs for the three months ended March 31, 2014. These costs are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income.

Preliminary Purchase Price Allocation

The Company accounted for Stream using the acquisition method of accounting in accordance with applicable U.S. GAAP whereby the total purchase price was preliminarily allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values. The following table summarizes the preliminary values of the assets acquired and liabilities assumed at the date of acquisition:



Preliminary purchase price allocation	At March 3, 2014
Assets:
Receivables	$	199.0
Other current assets	11.7
Property and equipment	160.1
Goodwill	280.9
Intangible assets	370.4
Other assets	13.7
Liabilities:
Accounts payable	(11.9		)
Accrued expenses	(99.6		)
Other current liabilities	(3.8		)
Debt	(34.6		)
Deferred tax - net	(70.5		)
Other long-term liabilities	(10.9		)
Total purchase price	$	804.5

As of March 31, 2014, the purchase price allocation for the acquisition was preliminary and subject to completion. Adjustments to the current fair value estimates in the above table may occur as the process conducted for various valuations and assessments is finalized. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The factors contributing to the recognition of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the Stream acquisition. The benefits include an enhanced global footprint, attractive synergy opportunities of revenue streams and expanded language capabilities. None of the goodwill is expected to be deductible for income tax purposes and was entirely allocated to the Customer Management - Agent Services reporting unit.

Intangible Assets Identified

The following details the total intangible assets identified:



Intangible asset type	Value		Life (years)
Customer relationship	$	352.0	17
Trade name	17.0		4
Favorable lease contract	1.4		1	-	7
Total	$	370.4

The preliminary fair value of the customer relationship asset was determined using the income approach through an excess earnings analysis, with projected earnings being discounted at a rate of 11.0%. The customer relationship intangible asset represents relationships between Stream and its customers. Convergys applied the income approach through a relief-from-royalty analysis to determine the preliminary fair value of the Stream trade name asset. The determination of the useful lives was based upon consideration of market participant assumptions and transaction specific factors.

Impact on Operating Results

The results of Stream's operations have been included in Convergys' Consolidated Financial Statements since the March 3, 2014 date of acquisition. The following table provides sales and results of operations from the acquired Stream business included in Convergys' March 31, 2014 results:



Stream results of operations	March 3, 2014 - March 31, 2014
Revenues	$	85.6
Loss before income taxes	$	(6.4	)

The following unaudited pro forma information assumes the acquisition of Stream occurred at the beginning of the respective periods presented. The unaudited pro forma information presented below is for illustrative purposes only, does not include the pro forma adjustments that would be required under Regulation S-X for pro forma financial information and does not reflect future events that may occur after March 31, 2014 or any operating efficiencies or inefficiencies that may result from the Stream acquisition and related financing. Additionally, this unaudited pro forma information for the three months ended March 31, 2014 includes certain one-time costs associated with the Company's integration of the acquired Stream operations. Therefore, the information is not necessarily indicative of results that would have been achieved had the business been combined during the periods presented or the results that the Company will experience going forward.



	Three months ended March 31,
Unaudited pro forma information	2014		2013
Revenues	$	777.1	$	746.6
Income from Continuing Operations, net of tax	$	7.9	$	30.9

Earnings from Continuing Operations per share
Basic	$	0.08	$	0.29
Diluted	$	0.07	$	0.28

Weighted average common shares outstanding
Basic	101.1		105.7
Diluted	107.3		110.3

Datacom Acquisition

On April 30, 2013, the Company acquired the business process outsourcing operations of New Zealand-based Datacom, including contact centers in Kuala Lumpur, Malaysia and Manila, Philippines. The purchase price of $20.0 AUD (approximately $20.0 USD) included $15.0 of cash paid at closing and $5.3 of debt obligations assumed, which were immediately paid by the Company, as well as working capital adjustments that were finalized during the third quarter of 2013. In connection with the acquisition, the Company recognized $12.2 of goodwill and $7.0 of customer relationship intangible asset. The customer relationship intangible asset will be amortized over an estimated economic useful life of 8 years. The determination of the useful life was based upon consideration of market participant and transaction specific factors. The Company included various industry studies, historical acquisition experience, economic factors, future cash flows of the combined company and the relative stability of the acquired customer base. The acquired goodwill is not expected to be deductible for tax purposes.