ACQUISITIONS

Our consolidated financial statements include the operating results for each acquired entity from its respective date of acquisition. We do not present pro forma financial information for these acquisitions given their results are not material to our consolidated financial statements. Transaction costs associated with these acquisitions were expensed as incurred and are not material for the years ended December 31, 2014, 2013, and 2012.

2014 Acquisitions

Interventional Business of Bayer AG

On August 29, 2014, we completed the acquisition of the Interventional Division of Bayer AG (Bayer), for a total cash consideration of $414 million. We believe that this acquisition enhances our ability to offer physicians and healthcare systems a more complete portfolio of solutions to treat challenging vascular conditions. The transaction includes the AngioJet® Thrombectomy System and the Fetch® 2 Aspiration Catheter, which are used in endovascular procedures to remove blood clots from blocked arteries and veins, and the JetStream® Atherectomy System, used to remove plaque and thrombi from diseased arteries. We are integrating the operations of the Bayer business with our Peripheral Intervention and Interventional Cardiology divisions.

IoGyn, Inc.

On May 7, 2014, we completed the acquisition of the remaining fully diluted equity of IoGyn, Inc. (IoGyn). Prior to the acquisition, we held a 28 percent minority interest in IoGyn in addition to notes receivable of approximately $8 million. Total consideration was comprised of a net cash payment of $65 million at closing to acquire the remaining 72 percent of IoGyn equity and repay outstanding debt. IoGyn has developed the Symphion^TMSystem, a next generation system for hysteroscopic intrauterine tissue removal including fibroids (myomas) and polyps. In March 2014, IoGyn received U.S. Food & Drug Administration (FDA) approval for the system and in October 2014, we began a limited market release of the system in the United States. We are integrating the operations of the IoGyn business with our gynecological surgery business, which is part of our Urology and Women’s Health division.

In addition, we completed other acquisitions during 2014 for total consideration of $7 million cash at closing plus contingent consideration of up to $4 million.

Purchase Price Allocation

We accounted for these acquisitions as business combinations and, in accordance with ASC Topic 805, Business Combinations, we have recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The components of the aggregate preliminary purchase price for Bayer and IoGyn acquisitions are as follows (in millions):



Cash, net of cash acquired	$	479
Fair value of prior interests	31
	$	510

Total consideration for the 2014 acquisitions included cash payments of $510 million, net of cash acquired, at closing of the transaction.

In addition, prior to the acquisition of IoGyn, we had an equity interest in IoGyn and held $8 million of notes receivables. We re-measured our previously held investments to their estimated acquisition-date fair value of $31 million and recorded a gain of $19 million in other, net, in the accompanying consolidated statements of operations during the second quarter of 2014. We measured the fair values of the previously held investments based on the liquidation preferences and priority of the equity interest and debt, including accrued interest.

The following summarizes the aggregate preliminary purchase price allocation for Bayer and IoGyn as of December 31, 2014:



Goodwill	$	210
Amortizable intangible assets	263
Inventory	23
Property, Plant and Equipment	17
Prepaid Transaction Service Agreement	5
Other net assets	(1		)
Deferred income taxes	(7		)
	$	510

We allocated a portion of the preliminary purchase price to specific intangible asset categories as follows:



	Amount Assigned (in millions)		Weighted Average Amortization Period (in years)	Range of Risk- Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	233	10 - 14	14 - 18 %
Customer Relationships	29		10	18%
Other intangible assets	1		2	14%
	$	263

We believe that the estimated intangible asset values represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets. These fair value measurements are based on significant unobservable inputs, including management estimates and assumptions and, accordingly, are classified as Level 3 within the fair value hierarchy prescribed by ASC Topic 820, Fair Value Measurements and Disclosures.

We recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, the majority of which is deductible for tax purposes. Goodwill was established due primarily to cost synergies expected to be gained from the integration of the businesses into our existing operations, as well as revenue and cash flow projections associated with future technologies, and has been allocated to our reportable segments based on the relative expected benefit. See Note D - Goodwill and Other Intangible Assets for more information related to goodwill allocated to our reportable segments.

2013 Acquisition

On November 1, 2013, we completed the acquisition of the electrophysiology business of C.R. Bard Inc. (Bard EP), for $274 million in cash. This acquisition added a strong commercial team and complementary portfolio of ablation catheters, diagnostic tools, and electrophysiology recording systems, which we believe will allow us to better serve the global Electrophysiology market through a more comprehensive portfolio offering and sales infrastructure.

Purchase Price Allocation

We accounted for this acquisition as a business combination and, in accordance with Financial Accounting Standards Board ASC Topic 805, Business Combinations, we have recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The components of the aggregate preliminary purchase price for the acquisition consummated in 2013 are as follows (in millions):



Cash, net of cash acquired	$	274
Fair value of contingent consideration	—
Fair value of prior interests	—
Fair value of debt assumed	—
	$	274

The following summarizes the aggregate purchase price allocation for the 2013 acquisition (in millions):



Goodwill	$	140
Amortizable intangible assets	112
Indefinite-lived intangible assets	—
Other net assets	19
Deferred income taxes	3
	$	274

We recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, the majority of which is deductible for tax purposes.

We allocated a portion of the purchase price to specific intangible asset categories as of the respective acquisition dates as follows:



	Amount Assigned (in millions)		Weighted Average Amortization Period (in years)	Range of Risk- Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	82	10	11.5%
Customer relationships	30		7	11.5%
	$	112

2012 Acquisitions

Cameron Health, Inc.

On June 8, 2012, we completed the acquisition of the remaining equity of Cameron Health, Inc. (Cameron). Cameron has developed the world's first and only commercially available subcutaneous implantable cardioverter defibrillator - the S-ICD® system. We have integrated the operations of the Cameron business into our CRM business. Total consideration included an initial $150 million cash payment at closing of the transaction, a payment of $150 million upon FDA approval of the S-ICD® system, which was paid to the former shareholders of Cameron after the receipt of FDA approval during the fourth quarter of 2012, and up to an additional $1.050 billion of potential payments upon achievement of specified revenue-based milestones over a six-year period following FDA approval.

BridgePoint Medical, Inc.

On October 4, 2012, we completed the acquisition of 100 percent of the fully diluted equity of BridgePoint Medical, Inc. (BridgePoint), a developer of catheter-based systems to treat coronary chronic total occlusions (CTOs). We have integrated the operations of the BridgePoint business into our Interventional Cardiology division. Total consideration included an initial $20 million at closing of the transaction and up to an additional $90 million of revenue-based earnouts and milestones through 2016.

Rhythmia Medical, Inc.

On October 8, 2012, we completed the acquisition of 100 percent of the fully diluted equity of Rhythmia Medical, Inc. (Rhythmia). Rhythmia is a developer of next-generation mapping and navigation solutions for use in cardiac catheter ablations and other electrophysiology procedures, including atrial fibrillation and atrial flutter. We have integrated the operations of the Rhythmia business into our Electrophysiology division. Total consideration included an initial $90 million at closing of the transaction and up to an additional $175 million of regulatory and revenue-based milestones and earnouts through 2017.

Vessix Vascular, Inc.

On November 19, 2012, we completed the acquisition of 100 percent of the fully diluted equity of Vessix Vascular, Inc. (Vessix). Vessix is a developer of a therapy to treat uncontrolled hypertension, or high blood pressure. We have integrated the operations of the Vessix business into our Peripheral Interventions division. Total consideration included an initial $125 million at closing of the transaction and up to an additional $300 million of clinical and revenue-based milestones and earnouts through 2016.

Purchase Price Allocation

The components of the aggregate purchase price for the acquisitions consummated in 2012 are as follows (in millions):



Cash, net of cash acquired	$	367
Fair value of contingent consideration	467
Fair value of prior interests	79
Fair value of debt assumed	9
	$	922

Total consideration for the 2012 acquisitions included $367 million of initial cash payments, net of cash acquired, at closing of the transactions, with potential payments of up to an additional $1.615 billion based upon achievement of certain regulatory- and commercialization-related milestones and revene-based milestones and earnouts through 2018. As of the respective acquisition dates, we recorded total contingent consideration liabilities of $467 million, representing the estimated fair value of the contingent consideration we expected to pay to the former shareholders of the acquired companies. The fair value of the contingent consideration liabilities was estimated by discounting, to present value, contingent payments expected to be made. In certain circumstances, we utilized a probability-weighted approach or monte carlo revenue simulation model to determine the fair value of contingent consideration.

Prior to the acquisition of Cameron, we had an equity interest in Cameron and held $40 million of notes receivable. We re-measured our previously held investments to their estimated acquisition-date fair value of $79 million and recorded a gain of $39 million in other, net in the accompanying consolidated statements of operations during the second quarter of 2012. We measured the fair values of the previously held investments based on the liquidation preferences and priority of the equity interests and debt, including accrued interest. In addition, we prepaid the assumed debt obligation of Cameron for approximately $9 million during the second quarter of 2012.

The following summarizes the aggregate purchase price allocation for the 2012 acquisitions (in millions):



Goodwill (non-deductible for tax purposes)	$	566
Amortizable intangible assets	189
Indefinite-lived intangible assets	132
Other net assets	15
Deferred income taxes	20
	$	922

We recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is non-deductible for tax purposes.

We allocated a portion of the final purchase price to specific intangible asset categories as of the respective acquisition dates as follows:



	Amount Assigned (in millions)		Weighted Average Amortization Period (in years)	Range of Risk- Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	187	8	14 - 28%
Customer relationships	2		5	14%
Indefinite-lived intangible assets:
In-process research and development	132			14 - 28%
	$	321

Our technology-related intangible assets consist of technical processes, intellectual property, and institutional understanding with respect to products and processes that we will leverage in future products or processes and will carry forward from one product generation to the next. We used the income approach to derive the fair value of the technology-related intangible assets, and are amortizing them on a straight-line basis over their assigned estimated useful lives.

Customer relationships represent the estimated fair value of the non-contractual customer and distributor relationships. Customer relationships are direct relationships with physicians and hospitals performing procedures with the acquired products, and distributor relationships are relationships with third parties used to sell products, both as of the acquisition date. These relationships were valued separately from goodwill as there is a history and pattern of conducting relationships with the customers and distributors on a contractual basis. We used the replacement cost and lost profits methodology to derive the fair value of the customer relationships. The customer relationships intangible assets are being amortized on a straight-line basis over their assigned estimated useful lives.

Contingent Consideration

Certain of our acquisitions involve contingent consideration arrangements. Payment of additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets or obtaining regulatory approvals. In accordance with U.S. GAAP, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability each reporting period and record changes in the fair value through a separate line item within our consolidated statements of operations.

We recorded a net benefit related to the change in fair value of our contingent consideration liabilities of $85 million during 2014, a net expense related to the change in fair value of our contingent consideration liabilities of $4 million during 2013, and a net benefit related to the change in fair value of our contingent consideration liabilities of $6 million during 2012. We made contingent consideration payments of $137 million, $165 million and $154 million in 2014, 2013 and 2012, respectively.

Changes in our contingent consideration liability were as follows (in millions):



Balance as of December 31, 2012	$	663
Amounts recorded related to new acquisitions	—
Other amounts recorded related to prior acquisitions	(1		)
Fair value adjustment	4
Contingent payments related to prior period acquisition	(165		)
Balance as of December 31, 2013	$	501
Amounts recorded related to new acquisitions	3
Other amounts recorded related to prior acquisitions	(8		)
Fair value adjustment	(85		)
Contingent payments related to prior period acquisition	(137		)
Balance as of December 31, 2014	$	274

As of December 31, 2014, the maximum amount of future contingent consideration (undiscounted) that we could be required to make associated with our acquisitions is approximately $1.908 billion.

Increases or decreases in the fair value of our contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of revenue estimates or in the timing or likelihood of achieving regulatory-, revenue- or commercialization-based milestones. The recurring Level 3 fair value measurements of our contingent consideration liability include the following significant unobservable inputs:



Contingent Consideration Liability	Fair Value as of December 31, 2014	Valuation Technique	Unobservable Input	Range
R&D, Regulatory and Commercialization-based Milestones	$85 million	Probability Weighted Discounted Cash Flow	Discount Rate	1.1%
			Probability of Payment	84% - 95%
			Projected Year of Payment	2015
Revenue-based Payments	$55 million	Discounted Cash Flow	Discount Rate	11.5% - 15%
			Probability of Payment	0% - 100%
			Projected Year of Payment	2015 - 2018
	$134 million	Monte Carlo	Revenue Volatility	11% - 13%
			Risk Free Rate	LIBOR Term Structure
			Projected Year of Payment	2015 - 2018

Contingent consideration liabilities are remeasured to fair value each reporting period using projected revenues, discount rates, probabilities of payment and projected payment dates. Projected contingent payment amounts related to R&D, regulatory- and commercialization-based milestones and certain revenue-based milestones are discounted back to the current period using a discounted cash flow model. Other revenue-based payments are valued using a monte carlo valuation model, which simulates future revenues during the earn out-period using management's best estimates. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. Increases in projected revenues and probabilities of payment may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs in isolation may result in a significantly lower or higher fair value measurement.