4. Business Combinations

Fiscal Year 2021 Transactions

eRx Network Holdings, Inc.

On May 1, 2020, we exercised our option to purchase and completed the acquisition of 100% of the ownership interest in eRx Network Holdings, Inc. (“eRx”), a leading provider in comprehensive, innovative and secure data-driven solutions for pharmacies. At the time of the acquisition, all outstanding eRx equity awards were canceled and holders of eRx stock options and vested eRx stock appreciation rights were able to elect to receive consideration in the form of a cash payment or vested stock appreciation rights of the Company. See Note 17, Incentive Compensation Plans, for additional information.

Prior to the acquisition, we held an option to purchase eRx which we accounted for as an equity investment. Therefore, our acquisition of eRx was accounted for as a business combination achieved in stages under the acquisition method in accordance with Accounting Standards Codification 805, Business Combinations (“ASC 805”). Accordingly, we remeasured our business purchase option to fair value and recognized a loss of $6,000 which is recorded within Other, net on our consolidated statement of operations.

The following table summarizes information related to this acquisition as of the acquisition date. The preliminary values of the consideration transferred, assets acquired and liabilities assumed in the eRx acquisition, including the related tax effects, were derived using the market-based approach and are subject to change upon the receipt of a final valuation and working capital settlement.


	eRx
Cash paid at closing	$	249,359
Fair value of eRx purchase option		140,500
Fair value of vested stock appreciation rights		5,097
Cash paid for canceled eRx equity awards		5,891
Total Consideration Fair Value at Acquisition Date	$	400,847

Allocation of the Consideration Transferred:
Cash	$	54,108
Accounts receivable, net of allowance of $326		12,747
Prepaid expenses and other current assets		609
Goodwill		225,807
Identifiable intangible assets:
Customer relationships (life 15 years)		106,000
Internally developed technology (life 8 years)		53,000
Other noncurrent assets		20
Accounts payable		(2,543)
Accrued expenses and other current liabilities		(10,462)
Deferred income tax liabilities		(38,439)
Total consideration transferred	$	400,847

The goodwill recognized, all of which is assigned to the Network Solutions segment, is primarily attributable to expected synergies of the combined businesses and the acquisition of an assembled workforce knowledgeable of the healthcare and information technology industries. The goodwill is not expected to be deductible for tax purposes. See Note 6, Goodwill.

Acquisition costs related to the purchase of eRx were not material.

PDX, Inc.

On June 1, 2020, we completed the purchase of 100% of the ownership interest in PDX, Inc. (“PDX”), a company focused on delivering patient centric and innovative technologies for pharmacies and health systems. We accounted for this transaction as a business combination using the acquisition method.

The preliminary values of the consideration transferred, assets acquired and liabilities assumed in the PDX acquisition, including the related tax effects, were derived using the market-based approach and are subject to change upon the receipt of a final valuation and working capital settlement. After customary working capital adjustments, transaction fees and other adjustments, the total consideration fair value at the acquisition date was $198,472. The following table summarizes the allocation of consideration transferred:


	PDX
Cash	$	962
Accounts receivable, net of allowance of $1,092		5,739
Prepaid expenses and other current assets		2,125
Property and equipment		840
Goodwill		109,267
Identifiable intangible assets:
Tradenames (life 20 years)		2,000
Customer relationships (life 15 years)		63,000
Technology-based intangible assets (life 8 years)		31,000
Other noncurrent assets		1,041
Accounts payable		(4,242)
Deferred revenue, current		(8,629)
Accrued expenses and other current liabilities		(4,409)
Other noncurrent liabilities		(222)
Total consideration transferred	$	198,472

The goodwill recognized, all of which is assigned to the Network Solutions segment, is primarily attributable to expected synergies of the combined businesses and the acquisition of an assembled workforce knowledgeable of the healthcare and information technology industries. The goodwill is expected to be deductible for tax purposes. See Note 6, Goodwill.

Acquisition costs related to the purchase of PDX were not material.

Fiscal Year 2020 Transactions

The Merger

On March 10, 2020 (the “Merger Effective Date”), the Company combined with SpinCo in a two-step all-stock “Reverse Morris Trust” transaction that involved a separation of SpinCo from McKesson followed by the merger of SpinCo with and into the Company, with the Company as the surviving company. As a result of the Merger, the Joint Venture became a wholly owned subsidiary of the Company.

McKesson accepted 15,426,537 shares of its own common stock, par value $0.01 in exchange for all 175,995,192 issued and outstanding shares of SpinCo common stock, par value $0.001 per share (the “SpinCo Common Stock”). All shares of SpinCo Common Stock were then converted into an equal number of shares of common stock of the Company, par value $0.001, which the Company issued to the former holders of SpinCo Common Stock, together with cash in lieu of any fractional shares.

Prior to the Merger, we accounted for our investment in the Joint Venture under the equity method of accounting. Therefore, the acquisition of control of the Joint Venture was accounted for as a business combination achieved in stages under the acquisition method in accordance with ASC 805. Accordingly, we remeasured our previously held equity interest in the Joint Venture to fair value by reference to the publicly traded price of the common shares issued to SpinCo shareholders in exchange for the remaining 58% equity interest in the Joint Venture. Upon remeasurement, we recognized a loss on investment of $230,229. The loss represents the amount by which the carrying value of our investment in the Joint Venture exceeded the fair value of our 42% interest immediately prior to the Merger.

The fair values of the assets acquired and the liabilities assumed were determined based on information available to the Company. Additional information is being gathered to finalize the provisional measurements with respect to deferred taxes. Accordingly, the measurement of the deferred tax assets acquired and deferred tax liabilities assumed may change upon finalization of the Company’s valuations and completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date. During the first quarter of fiscal year 2021, we increased the estimated fair value of our deferred tax liability by $1,604 which also impacted goodwill. There was no impact to the consolidated statement of operations as a result of the adjustment. We consider our accounting for the other assets acquired and liabilities assumed in the Merger to be complete.

The following table summarizes information related to this acquisition as of the acquisition date:


Net Assets acquired
Cash	$	330,665
Accounts receivable, net of allowance of $22,059		718,895
Contract assets		132,704
Prepaid and other current assets		115,265
Investment in business purchase option		146,500
Property and equipment, net		206,751
Goodwill		4,362,252
Other noncurrent assets		169,539
Identified intangible assets:
Customer relationships (life 12-16 years)		3,056,000
Tradenames (life 18 years)		146,000
Technology-based intangible assets (life 6-12 years)		1,188,000
Drafts and accounts payable		(60,637)
Accrued expenses		(559,456)
Deferred revenues, current		(292,528)
Current portion of long-term debt		(28,969)
Other current liabilities		(22,732)
Long-term debt, excluding current portion		(4,713,565)
Deferred income tax liabilities		(579,680)
Tax receivable agreement obligations with related parties		(176,586)
Other long-term liabilities		(102,675)
Net Assets acquired	$	4,035,743

Summary of purchase consideration:
Fair value of shares issued to SpinCo shareholders
(175,995,192 shares at $12.47 per share):
Common Stock, $0.001 par value	$	176
Additional paid-in capital		2,194,484
Fair value of Joint Venture equity interest previously held		1,589,040
Fair value of Joint Venture equity interest previously held through TEUs		216,764
Settlement of dividend receivable		42,778
Repayment of advances to member		(7,499)
Purchase consideration	$	4,035,743

The goodwill recognized in the Merger is primarily attributable to expected synergies of the combined businesses and the acquisition of an assembled workforce knowledgeable of the healthcare and information technology industries in which we operate. The majority of the goodwill is not expected to be deductible for tax purposes.

Acquisition costs related to the Merger were not material.