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 18, 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, at the acquisition, we remeasured our business purchase option to fair value and recognized a loss of $6,000 which is recorded in Other, net on our consolidated statement of operations.

The following table summarizes information related to this acquisition as of the acquisition date. The fair values of the assets acquired and the liabilities assumed were determined based on information available to the Company using primarily an income-based approach. During fiscal year 2021, we continued to make purchase price allocation adjustments to refine the fair value of assets acquired and liabilities assumed, including goodwill. These refinements primarily included an increase to the determined fair value of customer relationships and deferred tax liabilities and a decrease to the determined fair value of technology-based intangible assets. There were no material impacts to the consolidated statement of operations as a result of the adjustments. We consider our accounting for the assets acquired and liabilities assumed in the eRx acquisition to be complete.


	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		12,747
Prepaid expenses and other current assets		609
Goodwill		225,156
Identifiable intangible assets:
Customer relationships (life 17 years)		131,200
Technology-based intangible assets (life 9-12 years)		29,700
Other noncurrent assets		20
Accounts payable		(2,543)
Accrued expenses and other current liabilities		(10,933)
Deferred income tax liabilities		(39,217)
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 10, Goodwill and Intangible Assets.

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

PDX, Inc.

On June 1, 2020, we completed the cash 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 fair values of the assets acquired and the liabilities assumed were determined based on information available to the Company using primarily an income-based approach. Subsequent to June 1, 2020, we made purchase price allocation adjustments to refine the fair value of assets acquired, including goodwill. These refinements primarily included an increase to the determined fair value of customer relationships and decreases to the determined fair values of technology-based intangible assets and deferred revenue. There were no material impacts to the consolidated statement of operations as a result of the adjustments. Additional information is being gathered to finalize the amounts 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. We consider our accounting for the other assets acquired and liabilities assumed in the PDX acquisition to be complete.

After customary working capital adjustments, transaction fees and other adjustments, the total consideration fair value at the acquisition date was $198,291. The following table summarizes the allocation of consideration transferred:


	PDX
Cash	$	755
Accounts receivable		5,739
Prepaid expenses and other current assets		2,251
Property and equipment		840
Goodwill		98,830
Identifiable intangible assets:
Customer relationships (life 18 years)		74,300
Technology-based intangible assets (life 10-11 years)		25,300
Other noncurrent assets		690
Accounts payable		(3,882)
Deferred revenue, current		(2,946)
Accrued expenses and other current liabilities		(3,364)
Other long-term liabilities		(222)
Total consideration transferred	$	198,291

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 10, Goodwill and Intangible Assets.

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

Nucleus.io

In August 2020, we completed the acquisition of Nucleus.io, a leader in the development of advanced, fully enabled, cloud-native imaging and workflow technology. We acquired Nucleus.io for total consideration of $35,120 and accounted for the acquisition as a business combination. The consideration transferred was primarily allocated to technology-based intangible assets of $11,700 (life of 15 years) and goodwill of $22,341. The goodwill recognized is assigned to the Software and Analytics segment and is not expected to be deductible for tax purposes. The preliminary values of the consideration transferred, assets acquired and liabilities assumed in the acquisition, including the related tax effects, are subject to change upon receipt of a final valuation and working capital settlement. Acquisition costs related to the purchase of Nucleus.io were not material.

Fiscal Year 2020 Transactions

The Merger

On March 10, 2020, pursuant to the Agreement and Plan of Merger, dated December 20, 2016 (the “Merger Agreement”), the Company combined with SpinCo in a two-step all-stock “Reverse Morris Trust” transaction that involved (i) a separation of SpinCo from McKesson, followed by (ii) the merger of SpinCo with and into the Company, with the Company as the surviving company. As a result, 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 (the “McKesson Common Stock”) 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 (the “Change Common Stock”), which the Company issued to the former holders of SpinCo Common Stock, together with cash in lieu of any fractional shares.

Immediately following the Merger, approximately 58% of the outstanding Change Common Stock was held by pre-Merger holders of McKesson Common Stock and approximately 42% of the outstanding Change Common Stock was held by pre-Merger holders of Change Common Stock.

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 of $230,229 which is included in Loss from Equity Method Investment in the Joint Venture in the consolidated statement of operations. 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. During fiscal year 2021, we continued to make purchase price allocation adjustments to refine the fair values of assets acquired and liabilities assumed. These refinements primarily included net increases to our deferred tax liability and income taxes payable, which also impacted goodwill. There were no impacts to the consolidated statement of operations as a result of the adjustments. We consider our accounting for the assets acquired and liabilities assumed in the Merger to be complete.

The following table summarizes our net assets acquired and purchase price allocation:


Net assets acquired:	Amount
Cash	$	330,665
Accounts receivable, net of allowance of $22,059		718,895
Contract assets		132,704
Prepaid expenses and other current assets		115,436
Investment in business purchase option		146,500
Property and equipment, net		206,751
Goodwill		4,363,282
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
Accounts payable		(60,637)
Accrued expenses		(563,791)
Deferred revenue, 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		(576,546)
Tax receivable agreement obligations due to 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. The goodwill is not deductible for tax purposes. Acquisition costs related to the Merger were not material.

Results of Operations

Subsequent to the Merger, the results of operations attributable to the Joint Venture are included in our consolidated statements of operations. We generated revenues of $196,792 and a pre-tax loss of $4,288 from the Joint Venture from the acquisition date to March 31, 2020.

Pro Forma Financial Information (unaudited)

The following pro forma financial information was derived from the historical financial statements of the Company and the Joint Venture and gives effect to the acquisition as if it had occurred on April 1, 2018. The pro forma amounts were calculated by applying the Company’s accounting policies and adjusting the results of the Joint Venture to reflect (i) the additional depreciation and amortization that would have been charged resulting from the fair value adjustments to property and equipment and intangible assets, (ii) the additional interest expense associated with the consolidation of the Joint Venture’s long-term borrowings, and (iii) the decrease to revenue resulting from the fair value adjustment of assumed deferred revenue obligations.


	(Unaudited) Year Ended March 31,
	2021(1)	2020		2019
Total revenue	n/a	$	3,290,734	$	3,133,907
Net income (loss)	n/a	$	(228,234)	$	(128,889)
Net income (loss) per share, basic and diluted	n/a	$	(0.75)	$	(0.43)

⁽¹⁾

Pro forma information is not applicable as the Joint Venture’s results are fully consolidated for the year ended March 31, 2021.