Acquisitions and Divestitures

Fiscal 2015 Acquisition

On July 31, 2014, CSC acquired a privately held entity for $35 million in an all cash transaction. CSC acquired this entity primarily to enhance its cyber security, systems engineering, and software development service offerings in the federal intelligence sector. The purchase price was allocated to assets acquired and liabilities assumed based on preliminary estimates of fair value at the date of acquisition, as follows: $4 million to current assets, $9 million to an intangible asset other than goodwill, $9 million to current liabilities, and $31 million to goodwill. The intangible asset, which is associated with customer relationships and government programs, will be amortized over 15 years. The goodwill is associated with the Company's North American Public Sector (NPS) segment and is expected to be tax deductible. Pro forma financial information for this acquisition is not presented as the effects of the acquisition are not material to CSC's consolidated results. The allocation of purchase price is preliminary and is subject to additional information related to the liabilities that existed as of the acquisition date.

Fiscal 2014 Acquisitions

ServiceMesh Acquisition

On November 15, 2013, CSC acquired ServiceMesh Inc. (ServiceMesh or SMI), a privately-held cloud services management company, headquartered in Santa Monica, California, with operations in the United States, Australia and the United Kingdom, for total purchase consideration of $282 million. The acquisition enhances CSC's ability to help its clients migrate their applications into cloud computing environments and to automate the deployment and management of enterprise applications and platforms across private, public and hybrid cloud environments.

The purchase consideration included: 1) cash of $163 million paid at closing to and on behalf of the ServiceMesh shareholders, including $10 million paid to retire ServiceMesh's debt, and 2) additional consideration of $119 million contingent on the achievement of contractually agreed revenue targets. The Company incurred transaction costs of $4 million associated with this acquisition, which are included within selling, general and administrative expenses. The acquisition was funded from CSC's cash on hand at the time.

The amount of contingent consideration was based on a contractually defined multiple of ServiceMesh’s revenues during a specified period ending January 31, 2014. The Company determined the fair value of the contingent consideration payable using a probability-weighted approach, which at the end of the third quarter of fiscal 2014 was preliminarily estimated to be $137 million, representing the maximum amount of contingent consideration payable. During the fourth quarter, the Company reduced the fair value of the contingent consideration payable and goodwill by $18 million, based on additional facts and circumstances that existed as of the acquisition date but which were not known until the fourth quarter. These facts, had they been known, would have reduced the Company's original acquisition-date estimate of the fair value of contingent consideration to $119 million.

After the expiration of the contractual period, the final amount of the contingent consideration payable was determined to be $98 million, which was paid during the fourth quarter of fiscal 2014. The difference of $21 million, between the revised fair value of contingent consideration liability of $119 million and the actual amount paid of $98 million, was primarily due to the deferral of revenues related to certain software license sales to periods beyond the specified earn-out measurement period. This difference of $21 million was recorded as a reduction to selling, general and administrative expenses during the fourth quarter of fiscal 2014.

The results of ServiceMesh are included in the Company's consolidated financial statements within its GIS segment.

The allocation of the purchase consideration to the assets acquired and liabilities assumed, including the fourth quarter adjustments to the estimated fair value of contingent consideration, is presented below:



(Amounts in millions)	Estimated Fair Value
Accounts receivable and other current assets	$	3
Deferred tax assets	31
Intangible asset - developed technology	94
Intangible assets - customer relationships and trade names	10
Property and equipment and other non-current assets	2
Deferred revenue and other current liabilities	(4		)
Deferred tax liabilities	(38		)
Total identifiable net assets acquired	98
Goodwill	$	184
Total purchase consideration	$	282

As of the acquisition date, the fair value of trade receivables approximated book value and are considered fully recoverable. The Company’s purchase price allocation was finalized in the third quarter of fiscal 2015.

The amortizable lives associated with the intangible assets acquired are as follows:



Description	Estimated Useful Lives (Years)
Developed technology	9
Customer relationships	3
Trade names	4 - 6

The goodwill recognized in the acquisition is attributable to the intellectual capital, the acquired assembled work force, and expected cost synergies, none of which qualify for recognition as a separate intangible asset. The goodwill arising from the acquisition was preliminarily allocated to the Company's reportable segments based on the relative fair value of the expected incremental cash flows that the acquisition is expected to provide to each reporting unit within the Company's reportable segments. As of March 28, 2014, goodwill was allocated as follows: GBS: $28 million, GIS: $120 million, and NPS: $36 million. The goodwill is not deductible for tax purposes.

In connection with the ServiceMesh acquisition, the Company granted to certain ServiceMesh employees restricted stock units with a grant-date fair value of $41 million. These awards generally vest over a three-year period, associated with the continuing employment of the ServiceMesh employees, beginning from the date of acquisition, and are recorded as compensation expense ratably over the three-year period.

Infochimps Acquisition

On August 5, 2013, CSC acquired Infochimps, Inc. (Infochimps), a privately-held company, in an all-cash transaction for $27 million. The acquisition complements CSC’s existing Big Data business by providing a flexible, scalable, platform-as-a-service offering. The purchase price has been allocated to assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition: $2 million to current and other long-term assets, $2 million to current and long-term liabilities, and $27 million to goodwill. As of the acquisition date, the fair value of trade receivables approximated book value and was considered fully recoverable. The goodwill is associated with the Company's GBS segment and is not tax-deductible.

Pro forma financial information for the fiscal 2014 acquisitions was not presented as the effects of the acquisitions were not material to CSC's consolidated results.

Fiscal 2015 Divestiture

On July 31, 2014, CSC completed the sale of a German software business to a strategic investor for cash consideration of $3 million. This divestiture, which was a part of the GBS segment's healthcare group, resulted in a pre-tax loss of $22 million, representing the excess of the carrying value of the net assets of the business and transaction costs over the net proceeds. The divested assets and liabilities included: current assets of $54 million (including $21 million of cash); goodwill of $0; other noncurrent assets of $25 million; current liabilities of $33 million; and noncurrent liabilities of $23 million. The historical results of this business have been presented as discontinued operations in the Company's unaudited Consolidated Condensed Statement of Operations.

Fiscal 2014 Divestitures

On July 19, 2013, CSC's NPS segment completed the sale of its base operations, aviation and range services business unit, Applied Technology Division (ATD), to a strategic investor for cash consideration of approximately $178 million, plus a net working capital adjustment receivable of $6 million, for a pre-tax gain on disposal of $77 million. During the first quarter of fiscal 2015, NPS recorded a $1 million final net working capital adjustment, which reduced the total gain on sale of ATD.

On May 21, 2013, CSC completed the divestiture of its flood insurance-related business process outsourcing practice (flood insurance BPO) to a financial investor for cash consideration of $43 million plus a net working capital adjustment of $4 million, for a pre-tax gain on disposal of $25 million. During the fourth quarter of fiscal 2014, the Company received cash of $3 million, representing the final net working capital adjustment, and reduced the gain on disposal by $1 million. During the first quarter of fiscal 2015, CSC received an additional $2 million as a purchase price adjustment related to this divestiture, which was recorded as additional gain on sale on disposition.

Pursuant to the pension accounting policy change (see Note 2), the income from discontinued operations, net of taxes, for the third quarter and first nine months of fiscal 2014 increased by $0 million and $19 million, respectively, due to the reduced pension expense.

A summary of the results of the discontinued operations is presented below:



	Quarter Ended					Nine Months Ended
	January 2, 2015		December 27, 2013			January 2, 2015			December 27, 2013
Operations
Revenue	$	—	$	7		$	10		$	227

(Loss) income from discontinued operations, before taxes	—		(2		)	(11		)	10
Tax expense	—		1			—			6
Net (loss) income from discontinued operations	$	—	$	(3	)	$	(11	)	$	4

Disposal
(Loss) gain on disposition, before taxes	$	—	$	(2	)	$	(21	)	$	102
Tax (benefit) expense	—		—			(3		)	15
(Loss) gain on disposition, net of taxes	$	—	$	(2	)	$	(18	)	$	87

(Loss) income from discontinued operations, net of taxes	$	—	$	(5	)	$	(29	)	$	91