Mergers and Acquisitions

12 Months Ended

Jun. 30, 2012

Acquisitions [Abstract]

Acquisitions and Mergers

Note 2 — Acquisitions and Mergers

Acquisitions

During the fourth quarter of fiscal 2012 and second and third quarters of fiscal 2011, we completed three acquisitions. These acquisitions were not material for the purposes of financial statement disclosuresas required by ASC 805. The following summary is provided to give our investors a better understanding of these recent strategic acquisitions.

Extend Health Acquisition

On May 29, 2012, Towers Watson purchased Extend Health, a leading provider of health benefit management services and operator of the largest private Medicare exchange,for $435 million in cash and assumed stock options valued at $11.2 million. See Note 14 for further information on the assumed stock options.This acquisition enables Towers Watson to provide employers with health care solutions that combine specialized retiree medical transition consulting with the choice and cost advantages of individual Medicare plans purchased on a private exchange. Extend Health now operates as a new business segment called Exchange Solutions within Towers Watson, alongside the existing segments of Benefits, Talent and Rewards, and Risk and Financial Services. We included the results of Extend Health's operations since its acquisition date in the Exchange Solutions segment and in our consolidated financial statements.

During the fourth quarter of fiscal 2012, we recorded the tangible assets received and liabilities assumed and the preliminary fair value of intangibles: $123.2 million of customer related intangibles, $26.7 million of developed technology, and less than $1 million of favorable lease agreements and trade name intangibles. Our estimate of fair value was developed using income approach valuation models such as the multi-period excess earnings method for the customer-related intangibles and the relief from royalty method for the developed technology intangible. Significant assumptions used in the valuation are: revenue growth rates, retention rates, expense and contributory asset charges, royalty rates and discount rates. Based on preliminary estimates, we recorded an increase to our current income tax receivables of $3.1 million for tax losses to be carried back to the June 30, 2011 U.S. federal income tax return. Also related to taxes, we recorded net deferred tax liabilities of $53.8 million.As a result of purchase accounting, we will not realize $14.6 million of deferred revenue associated with cash received for commissions paid by carriers per policies placed prior to the acquisition as there is no subsequent performance obligation. Wedetermined that total consideration transferred was $446.2millionand recorded $341.0 million of goodwill related to the acquisition of Extend Health. However, we have not yet finalized the preliminary assessment of the fair value of tangible assets and intangible assets separate from goodwill.

EMB Acquisition

On January 31, 2011, Towers Watson purchased EMB, a large specialist property/casualty consulting and software company. The EMB business complements our Risk Consulting and Software line of business in our Risk and Financial Services segment. We paid $69.8 million in cash and issued common stock valued at $11.4 million consisting of 113,858 shares of Class B-3 and 113,858 shares of Class B-4 common stock, which convert to Towers Watson Class A common stock on January 1, 2013 and 2014, respectively. The Asian put model was used to calculate the discounts on the restrictions of the underlying stock. We have included an estimated earn-out payment of $16.9 million in consideration. The estimated earn-out payment was not adjusted during the fiscal year ended June 30, 2012. The purchase agreement calls for deferred cash payments totaling $27.9 million, which are recorded as compensation expense over the period earned by the former partners subject to continued employment. During the third and fourth quarters of fiscal 2011, we recorded the tangible assets received and liabilities assumed and the preliminary fair value of deferred revenue and intangibles: $13.5 million of customer related intangibles, $12.1 million of developed technology, $1.6 million of in-process technology and $0.6 million of unfavorable lease agreements. We estimated that a discount of $9.6 million was required to record the fair value of the deferred maintenance revenue acquired based on the cost of maintenance plus a modest profit over the remaining contract period. We finalized our initial assessment of deferred income tax amounts and recorded $2.9 million of deferred tax liabilities. As of September 30, 2011, we finalized the purchase accounting and determined that total consideration transferred was $101.9 million and goodwill was $59.0 million.

Aliquant Acquisition

On December 31, 2010, Towers Watson purchased Aliquant, a privately-held, full-service health and welfare benefits administration outsourcing firm for $67.7 million. The Aliquant business complements the U.S. portion of our Technology and Administration Solutions practice in our Benefits segment. The preliminary estimate of consideration transferred and allocation of the fair value to tangible and intangible assets received and liabilities assumed was recorded in the third quarter of fiscal 2011, which included fixed assets, customer related intangibles, developed technology and non-compete agreements at their estimated acquisition date fair values. Our estimate of fair value was developed using income approach valuation models such as the multi-period excess earnings method for the customer related intangibles of $13.9 million and the relief from royalty method for the developed technology intangible of $4.0 million. Significant assumptions used in the valuation are: revenue growth rate, retention rate, expense and contributory asset charges, royalty rate and discount rate. As of September 30, 2011, we finalized the purchase accounting and recorded $49.5 million of goodwill related to the acquisition of Aliquant.

Merger

Watson Wyatt and Towers Perrin merged on January 1, 2010 to form Towers Watson in order to combine the strengths and a strong set of complementary services of the legacy firms to drive growth and result in a larger global presence and market share gains across all of our business lines. All outstanding Towers Perrin and Watson Wyatt common stock, restricted stock units and derivative securities were converted into the right to receive consideration valued at $1.8 billion in the aggregate.

The consideration consisted of:

• 46,911,275 shares of Towers Watson Class A common stock including 4,248,984 shares of Restricted Towers Watson Class A common stock;
• 29,483,008 shares of Towers Watson Class B common stock, divided into Classes B-1, B-2, B-3 and B-4 (see Note 13 for further information);
• 8,548,835 shares of Towers Watson Class R common stock, which subsequently were redeemed automatically in exchange for the right to receive $200 million in cash and Towers Watson Notes in an aggregate principal amount of $200 million (which were redeemed in full on January 3, 2011).

As part of the Merger, we recorded the tangible assets and liabilities assumed and the fair value of the following intangibles: $140.8 million of customer relationships, $275.5 million of a trade names, $58.2 million of external-use developed technology, $67.2 million of internal-use developed technology, $11.1 million of favorable lease agreements, and $28.6 million of unfavorable lease agreements. Additionally, we recorded net deferred tax assets of $149.4 million and goodwill of $1.3 billion.

PCIC

As of December 31, 2009, Towers Perrin and Watson Wyatt each owned a 36.4% equity investment in Professional Consultants Insurance Company (“PCIC”). PCIC is a captive insurance company that provides professional liability insurance on a claims-made basis. Watson Wyatt applied the equity method of accounting for its investment in PCIC through December 31, 2009. As a result of the Merger, Towers Watson has a majority ownership interest in PCIC and consequently retained a majority of the economic risks and rewards of PCIC. Therefore, Towers Watson has consolidated PCIC's financial position and results of operations in its consolidated financial statements since January 1, 2010. All intercompany accounts and transactions have been eliminated in consolidation.