|Acquisitions, Goodwill, and Other Intangible Assets
On January 31, 2020, we acquired Hueler Analytics' Stable Value Fund Comparative Universe Data and Stable Value Index (Hueler Analytics). We began consolidating the financial results of Hueler Analytics in our consolidated financial statements on January 31, 2020.
On April 3, 2020, we acquired PlanPlus Global, a financial-planning, risk-profiling, and portfolio tracking software firm. The acquisition expands our financial-planning capabilities for advisors. We began consolidating the financial results of PlanPlus Global in our consolidated financial statements on April 3, 2020.
Increased Ownership Interest in Sustainalytics Holding B.V. (Sustainalytics)
On July 2, 2020, we completed the acquisition of the remaining 60% interest in Sustainalytics, a globally recognized leader in environmental, social, and governance (ESG) ratings and research, for an initial cash payment of $61.2 million. The acquisition was accounted for as a business combination with July 2, 2020 as the date of acquisition, and the Company was determined to be the acquirer. Accordingly, we began consolidating the financial results of Sustainalytics in our consolidated financial statements on July 2, 2020. We previously held an approximately 40% ownership interest in Sustainalytics, which had an estimated fair value of $75.4 million at the date of the acquisition and a book value of $24.5 million immediately prior to the acquisition, and resulted in the recording of a holding gain of $50.9 million.
The transaction has been accounted for as a business combination using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of July 2, 2020, and may be adjusted during the measurement period of up to 12 months from the acquisition date as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. Subsequent measurement changes for certain contingent liabilities will generally be recognized in the Company’s future earnings.
Consideration related to the acquisition consists of an initial cash payment of $61.2 million and contingent payments with an acquisition date fair value of $75.2 million, a portion of which is treated as additional purchase consideration and the remainder, which is sometimes referred to as an earn-out, but accounted for and described as compensation expense for purpose of the following discussion and disclosure. The acquisition date fair values of the additional purchase consideration and compensation are $47.4 million and $27.8 million, respectively. The contingent payments are due on the first and second anniversaries of the acquisition date, and each payment is determined based on a multiple of Sustainalytics' revenues for the years ended December 31, 2020 and 2021, respectively, which are also the measurement periods for determining the final payments. We used a Monte Carlo simulation to arrive at the estimated fair values of the contingent payments at the acquisition date. At subsequent balance sheet dates, the additional purchase consideration, including contingent payments, will continue to be measured at fair value and is classified as "Contingent consideration liabilities" and "Other long-term liabilities" on our condensed Consolidated Balance Sheet as of September 30, 2020. The compensation will be measured based on probability weighted future benefits expected to be paid, and is reflected in "Current liabilities - Accrued compensation" and "Accrued Compensation" on our Condensed Consolidated Balance Sheet as of September 30, 2020.
The book value of our 40% ownership interest immediately prior to the acquisition date was $24.5 million, and we recorded a $50.9 million non-cash holding gain for the difference between the fair value and the book value of our previously-held equity interest. The acquisition of the additional 60% interest was considered an acquisition achieved in stages and resulted in the remeasurement of the previously-held equity interest to fair value. The Company determined the fair value of the previously-held equity interest using a discounted cash flow analysis (an income approach) based on projected cash flows for Sustainalytics to derive total purchase consideration, which was divided by fully diluted outstanding shares to determine the fair value per share. The fair value per share was then applied to the shares of Sustainalytics held by the Company to derive the acquisition date fair value of the previously-held equity interest. The gain is classified as "Holding gain on previously-held equity interest" in our Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2020.
As of September 30, 2020, we completed our initial determination of the fair values of the acquired, identifiable assets and liabilities based on the information available. There are various areas that are not yet finalized due to information that may become available subsequently, which may result in changes in the values assigned to various assets and liabilities, including, but not limited to, assumed current and deferred tax assets and liabilities. If additional information related to the acquisition date fair value determinations becomes available within 12 months of the acquisition date, there may be adjustments to these initial fair value measurements.
The following table summarizes our allocation of the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
|Fair value of consideration transferred||$||108.6 |
|Fair value of the previously-held equity interest||75.4 |
|Cash and cash equivalents||$||9.8 |
|Accounts receivable||6.2 |
|Intangible assets, net||79.5 |
|Operating lease assets||5.2 |
|Other current and non-current assets||7.6 |
|Operating lease liability||(5.2)|
|Deferred tax liability, net||(17.4)|
|Other current and non-current liabilities||(15.6)|
|Total fair value of net assets acquired||$||48.9 |
Accounts receivable acquired were recorded at gross contractual amounts receivable, which approximates fair value. We expect to collect substantially all of the gross contractual amounts receivable within a reasonable period of time after the acquisition date.
The preliminary allocation of the estimated fair values of the assets acquired and liabilities assumed includes $79.5 million of acquired intangible assets, as follows:
|(in millions)||Weighted average useful life (years)|
|Customer-related assets||$||22.9 ||20|
|Technology-based assets||46.7 ||10|
|Intellectual property||9.9 ||10|
|Total intangible assets||$||79.5 |
Goodwill of $135.1 million represents the excess over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for income tax purposes.
We recognized a preliminary net deferred tax liability of $17.4 million primarily because the amortization expense related to certain intangible assets is not deductible for income tax purposes.
During the second quarter of 2020, we finalized the purchase price allocation related to our acquisition of DBRS and did not record any significant adjustments compared with the preliminary estimates disclosed in the Notes to the Audited Consolidated Financial Statements included in our Annual Report.
The following table shows the changes in our goodwill balances from December 31, 2019 to September 30, 2020:
| ||(in millions)|
|Balance as of December 31, 2019||$||1,039.1 |
|Acquisition of Sustainalytics||135.1 |
|Balance as of September 30, 2020||$||1,178.1 |
We did not record any goodwill impairment losses in the first nine months of 2020 and 2019. We perform our annual impairment reviews in the fourth quarter or when impairment indicators and triggering events are identified.
The following table summarizes our intangible assets:
| ||As of September 30, 2020||As of December 31, 2019|
|Customer-related assets||$||402.9 ||$||(152.2)||$||250.7 ||11||$||377.9 ||$||(130.3)||$||247.6 ||11|
|Technology-based assets||219.7 ||(127.9)||91.8 ||7||163.7 ||(112.0)||51.7 ||7|
|Intellectual property & other||81.1 ||(40.8)||40.3 ||8||69.3 ||(35.2)||34.1 ||8|
|Total intangible assets||$||703.7 ||$||(320.9)||$||382.8 ||10||$||610.9 ||$||(277.5)||$||333.4 ||10|
The following table summarizes our amortization expense related to intangible assets:
| ||Three months ended September 30,||Nine months ended September 30, |
|Amortization expense||$||15.6 ||$||13.3 ||$||43.3 ||$||23.1 |
We amortize intangible assets using the straight-line method over their expected economic useful lives.
We expect intangible amortization expense for the remainder of 2020 and subsequent years to be as follows:
| ||(in millions)|
|Remainder of 2020 (from October 1 through December 31)||$||15.7 |
Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, divestitures, changes in the estimated useful lives, impairments, and foreign currency translation.