Note 11 — Acquisitions

Refer to Note 24 of the Company’s audited financial statements for the year ended December 31, 2015, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC, for a discussion regarding acquisitions.

On April 1, 2016, the Company acquired all of the outstanding capital stock of TransFirst for an aggregate purchase price of $2.35 billion in cash as of the closing, which is subject to certain working capital and other adjustments, as described in the Purchase Agreement. TransFirst previously operated as a privately held company, under the ownership of Vista Equity Partners. The results of the newly acquired business are being reported by TSYS as part of the Merchant Services segment.

The Company funded the cash consideration and the payment of transaction-related expenses through a combination of cash-on-hand and proceeds from debt financings, including proceeds drawn under the Company’s Credit Agreement and the proceeds from an issuance of Notes, which together included proceeds of approximately $2.35 billion.

The goodwill amount of $1.7 billion arising from the acquisition is primarily attributable to the expansion of customer base, differentiated distribution channels and economies of scale expected from combining the operations of TSYS and TransFirst. All of the goodwill was assigned to TSYS’ Merchant Services segment. The goodwill recognized is not expected to be deductible for income tax purposes.

The following table summarizes the consideration paid for TransFirst and the preliminary recognized amounts of the identifiable assets acquired and liabilities assumed on April 1, 2016 (the acquisition date) as of September 30, 2016.


(in thousands)	September 30, 2016
Consideration
Cash	$	2,351,400
Fair value of total consideration transferred	$	2,351,400

Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash	$	5,907
Accounts receivable, net		62,313
Property, equipment and software		12,726
Identifiable intangible assets		814,131
Deferred tax asset		2,244
Other assets		7,509
Deferred tax liability		(206,645)
Financial liabilities		(56,500)
Total identifiable net assets		641,685
Goodwill		1,709,715
	$	2,351,400

In the three months ended September 30, 2016, there was a $56,000 increase in the purchase price due to the finalization of the working capital requirement. In addition, there was a $2 million decrease in identifiable intangible assets and a $112,000 decrease in deferred tax liabilities that resulted in a net increase to goodwill of $1.9 million. These amounts will remain preliminary until the valuation analysis has been finalized. The measurement period during which changes in assets, liabilities, equity interests, or items of consideration are subject to adjustment ends one year following the acquisition date. The Company continues to evaluate consideration paid, deferred taxes, intangible assets, goodwill and financial liabilities.

Identifiable intangible assets acquired in the TransFirst acquisition include merchant relationships, channel partners, current technology, the TransFirst trade name, non-compete agreements and a favorable lease. The identifiable intangible assets had no significant estimated residual value. These intangible assets are being amortized over their estimated useful lives of one to ten years based on the pattern of expected future economic benefit, which approximates a straight-line basis over the useful lives of the assets. The fair value of the acquired identifiable intangible assets of $814.1 million was estimated using the income approach (discounted cash flow and relief from royalty methods) and cost approach. The fair values and useful lives of the identified intangible assets were primarily determined using forecasted cash flows, which included estimates for certain assumptions such as revenues, expenses, attrition rates and royalty rates. The estimated fair value of identifiable intangible assets acquired in the acquisition and the related estimated weighted average useful lives are as follows:


(in millions)		Fair Value	Weighted Average Useful Life (in years)
Merchant relationships	$	588.0	10.0
Channel partners		121.0	10.0
Current technology		72.0	5.0
Trade name		16.0	1.0
Covenants not-to-compete		15.0	3.0
Favorable lease		2.1	5.6
Total acquired identifiable intangible assets	$	814.1	9.2

The fair value measurement of the identifiable intangible assets represents Level 2 and Level 3 measurements as defined by GAAP. Key assumptions include (a) cash flow projections based on market participant and internal data, (b) a discount rate of 8.5%, (c) a pre-tax royalty rate range of 1%-3%, (d) attrition rates of 11%-16%, (e) an effective tax rate of 40%, and (f) a terminal value based on a long-term sustainable growth rate of 3%.

In connection with the acquisition, TSYS incurred $29.6 million in acquisition-related costs primarily related to professional, legal and accounting costs, which are recorded in selling, general and administrative expenses and $9.8 million related to the bridge term loan facility, which is included in interest expense. These costs are expensed as incurred and are included in the income statement for the nine months ended September 30, 2016. The Company recorded $841.8 million of revenue and $13.8 million of operating income since the acquisition date that is included in the consolidated results through the nine months ended September 30, 2016 as a result of the TransFirst acquisition.

Pro Forma Results of Operations

The following unaudited pro forma information shows the results of our operations for the three and nine months ended September 30, 2016 and September 30, 2015 as if the acquisition of TransFirst had occurred on January 1, 2015. The unaudited pro forma information reflects certain pro forma adjustments to the combined historical financial information of TSYS and TransFirst. The pro forma adjustments include incremental amortization and depreciation expense, incremental interest expense associated with new long-term debt, a reduction of revenues and operating expenses associated with contracts existing between the companies and the elimination of nonrecurring transaction costs directly related to the acquisition.

The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of what would have occurred if the acquisition had occurred as of that date. The unaudited pro forma information is also not intended to be a projection of future results due to the integration of the acquired business.


	Actual			Supplemental pro forma
	Three months ended September 30,			Three months ended September 30,
	2016		2015	2016	2015
(in thousands, except per share data)
Revenue	$	1,146,888	707,890	1,146,888	827,592
Net income attributable to TSYS common shareholders	$	85,352	120,622	88,413	114,029
Basic EPS attributable to TSYS common shareholders	$	0.46	0.66	0.48	0.63
Diluted EPS attributable to TSYS common shareholders	$	0.46	0.65	0.48	0.62


	Actual			Supplemental pro forma
	Nine months ended September 30,			Nine months ended September 30,
	2016		2015	2016	2015
(in thousands, except per share data)
Revenue	$	3,037,853	2,062,698	3,430,012	2,412,262
Net income attributable to TSYS common shareholders	$	245,688	281,216	273,058	247,533
Basic EPS attributable to TSYS common shareholders	$	1.34	1.53	1.49	1.35
Diluted EPS attributable to TSYS common shareholders	$	1.33	1.52	1.49	1.35

The unaudited pro forma financial information presented above does not purport to represent what the actual results of our operations would have been if the acquisition of TransFirst’s operations had occurred prior to January 1, 2015, nor is it indicative of the future operating results of TSYS. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, including, but not limited to, anticipated cost savings from operating synergies.

The unaudited pro forma financial information presented in the table above has been adjusted to give effect to adjustments that are (1) directly related to the business combination; (2) factually supportable; and (3) expected to have a continuing impact. These adjustments include, but are not limited to, the application of accounting policies; and depreciation and amortization related to fair value adjustments to property, plant and equipment and intangible assets.

The pro forma adjustments do not reflect the following material items that result directly from the acquisition and which impacted our statement of operations following the acquisition:

Acquisition and related financing transaction costs relating to fees to investment bankers, attorneys, accountants, and other professional advisors, and other transaction-related costs that were not capitalized as deferred financing costs; and

The effect of anticipated cost savings or operating efficiencies expected to be realized and related charges such as technology and infrastructure integration expenses, and other costs related to the integration of TransFirst into TSYS.

In March 2016, the Company completed the acquisition of the remaining 45% interest in TSYS Managed Services EMEA Limited (EMEA) from Merchants Limited. The Company acquired the outstanding stock from Merchants Limited for approximately £4.2 million, or $5.9 million, in cash. In connection with the purchase, the Company repaid the outstanding balance of the existing debt between EMEA and Merchants Limited of approximately £2.2 million, or $3.0 million.

In September 2016, the Company adjusted goodwill for NetSpend to include an additional $634,000 for a change in unrecognized income tax benefits associated with the acquisition resulting from active audits at the time of the acquisition.