Note 12 — Acquisitions

Refer to Note 22 of the Company’s audited financial statements for the year ended December 31, 2017, which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC, for a discussion regarding acquisitions.

Cayan

On January 11, 2018, TSYS completed the acquisition of 100 percent ownership of Cayan, a payment technology company focused on integrated payment solutions and merchant acquiring, in an all cash transaction valued at approximately $1.05 billion. In connection with the acquisition, the Company entered into a Loan Facility with Bank of America, N.A. as administrative agent and the other lenders a party thereto from time to time to provide a $450 million two-year bilateral loan (see Note 5). The results of the newly acquired business are being reported by TSYS as part of the Merchant Solutions segment.

The goodwill amount of $0.8 billion arising from the acquisition is primarily attributable to the expansion of customer base, differentiation in market opportunity and economies of scale expected from combining the operations of TSYS and Cayan. All of the goodwill was assigned to TSYS’ Merchant Solutions segment. The goodwill recognized is not expected to be deductible for income tax purposes.

The following table summarizes the consideration paid for Cayan and the preliminary recognized amounts of the identifiable assets acquired and liabilities assumed on January 11, 2018 (the acquisition date). 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.


(in thousands)
Consideration
Cash	$	1,053,709
Fair value of total consideration transferred	$	1,053,709

Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash	$	16,856
Accounts receivable		16,846
Property, plant and equipment		27,048
Other assets		10,489
Identifiable intangible assets		321,585
Deferred tax liabilities		(113,828)
Other liabilities		(33,245)
Total identifiable net assets		245,751
Goodwill		807,958
Total identifiable assets acquired and liabilities assumed	$	1,053,709

Identifiable intangible assets acquired in the Cayan acquisition include channel relationships, merchant relationships, current technology, the Cayan and Genius trade names, non-compete agreements and favorable leases. 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 $321.6 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	$	172.5	8.0
Channel relationships		80.4	10.0
Technology		40.8	5.0
Trade names		22.9	3.5
Covenants not-to-compete		3.3	2.0
Favorable leases		1.7	6.5
Total acquired identifiable intangible assets	$	321.6	7.7

The fair value measurement of the identifiable intangible assets represents Level 2 and Level 3 measurements as defined in ASC 820, Fair Value Measurement. Key assumptions include (a) cash flow projections based on market participant and internal data, (b) a discount rate of 12.0%, (c) a pre-tax royalty rate range of 1.5-2.0%, (d) attrition rate of 12.0%, (e) an effective tax rate of 27%, and (f) a terminal value based on a long-term sustainable growth rate of 3%.

In connection with the acquisition, TSYS incurred $13.6 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 consolidated statements of income for the three months ended March 31, 2018.

Pro Forma Results of Operations

The revenue and operating loss of Cayan included in the Company’s consolidated statements of income since the acquisition are $42.0 million and ($3.4) million, respectively. The following unaudited pro forma financial information shows the results of operations of the combined entities as if the acquisition of Cayan had occurred on January 1, 2017. The unaudited pro forma information reflects certain pro forma adjustments to the combined financial information of TSYS and Cayan. The pro forma adjustments include incremental depreciation and amortization expense, incremental interest expense associated with new long-term debt and the elimination of non-recurring transaction costs directly related to the acquisition. Pro forma total revenues and pro forma net income attributable to TSYS common shareholders for the three months ended March 31, 2018 did not differ materially from actual total revenues and net income attributable to TSYS common shareholders.


	Supplemental pro forma
	Three months ended
(in thousands, except per share data)	March 31, 2017
Total revenues	$	1,217,517
Net income attributable to TSYS common shareholders	$	96,297

The unaudited pro forma financial information presented above does not purport to represent what the actual results of operations would have been if the acquisition of Cayan’s operations had occurred prior to January 1, 2017, 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 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 restructuring charges such as technology and infrastructure integration expenses, and other costs related to the integration of Cayan into TSYS.