Business Combinations

3 Months Ended

Mar. 31, 2020

On May 24, 2019, the company acquired OppenheimerFunds, an investment management subsidiary of Massachusetts Mutual Life Insurance Company’s (MassMutual), with consideration to MassMutual and OppenheimerFunds employee shareholders consisting of $35.0 million in cash, 81.9 million shares of common stock and $4.0 billion in perpetual, non-cumulative preferred shares with a 21-year non-call period and a fixed rate of 5.9%. The 81.9 million shares are composed of 75.7 million common shares issued on the closing date and 6.2 million Invesco restricted common stock awards granted to employee shareholders. MassMutual has an approximate 16.5% stake in the common stock of the combined firm as of March 31, 2020. Invesco and MassMutual entered into a shareholder agreement, in which MassMutual has customary minority shareholder rights, including representation on Invesco’s board of directors. The shareholder agreement with MassMutual specifies a lock-up period of two years for the common stock and five years for the preferred stock. MassMutual may not sell common or preferred shares received as purchase consideration during the respective lock-up periods.

The acquired business enhances the company’s ability to meet client needs through its comprehensive range of high-conviction active, passive and alternative capabilities.

The transaction was accounted for under the acquisition method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the transaction. The issuance of common stock and preferred stock consideration represents a non-cash financing activity related to the statement of cash flows.

The following table summarizes the estimate of amounts of identified assets acquired and liabilities assumed at the acquisition date, as well as the consideration transferred to acquire OppenheimerFunds. Additional changes to the allocation to certain assets, liabilities and tax estimates are not expected but could occur. The company will finalize the acquisition accounting (including the valuation) within the required measurement period, but in no event not later than one year from May 24, 2019.



	March 31, 2020
$ in millions	Fair Value Estimate
ASSETS
Cash and cash equivalents	360.0
Accounts receivable	133.1
Investments	178.4
Prepaid assets	24.8
Other assets	181.2
Property, equipment and software, net	104.1
Intangible assets ⁽¹⁾	5,189.0
Goodwill ⁽²⁾	1,507.6
Total assets	7,678.2
LIABILITES
Accrued compensation and benefits	263.9
Accounts payable and accrued expenses⁽²⁾	730.4
Deferred tax liabilities, net	1,088.0
Total liabilities	2,082.3
Total identifiable net assets	5,595.9

Summary of consideration
Cash consideration	35.0
Common stock consideration ⁽³⁾	1,453.6
Preferred stock consideration ⁽⁴⁾	4,010.5
Other consideration ⁽⁵⁾	96.8
Total cash and stock consideration	5,595.9

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(1)	Intangible assets are comprised of the following:


•	indefinite-lived intangible asset related to management contracts of $4,907.0 million consists primarily of contracts related to mutual funds.


•	finite-lived intangible asset related to management contracts of $255.0 million consists primarily of contracts related to sub-advised accounts and has an estimated useful life of eight years.


•	acquired trade name asset of $27.0 million has an estimated useful life of six years.

The intangible assets created in the acquisition are not expected to be deductible for tax purposes.

(2)

Goodwill is calculated as the difference between the acquisition date fair value of the total consideration transferred and the aggregate values assigned to the assets acquired and liabilities assumed. The goodwill created in the acquisition is not expected to be deductible for tax purposes. The goodwill balance resulted primarily from the opening balance sheet net deferred tax liability. Additionally, an adjustment was made to goodwill during first quarter 2020 as a result of the matter described below. See Note 6 -- "Goodwill" for additional details regarding the accounting matter.

As part of the acquisition, the company acquired the management contracts of the Invesco Oppenheimer SteelPath-branded MLP funds and became the Adviser to the funds. In the fourth quarter 2019, the company identified an accounting matter related to the funds’ financial statements and concluded that it was reasonably possible, but not probable, that the company would incur at least some costs associated with the matter. Accordingly, no accrual was made at December 31, 2019.

Following a regulatory consultation on the matter that concluded after the company filed its 2019 Annual Report on Form 10-K, the company changed its assessment of the likelihood of a loss to probable. Based on this new information about the facts and circumstances, the company adjusted the initial accounting for the acquisition by recording a liability of an estimated amount of $380.5 million and a deferred tax asset of $93.5 million (for expected future tax benefits) during the first quarter of 2020 for pre-acquisition activity related to the matter. The liability and associated deferred tax asset recorded represents management’s current best estimate based on its current understanding of the relevant facts. As this accounting adjustment was recorded during the measurement period of one year after the acquisition date, a corresponding adjustment of $287.0 million ($380.5 million net of $93.5 million of deferred tax asset) was made to goodwill. As additional information about the matter is finalized, the estimate may change. In accordance with ASC 805 Business Combinations, any further adjustments made during the measurement period, will be recorded as an adjustment to goodwill. See Note 15 -- "Commitments and Contingencies" for additional details regarding the accounting matter.

(3)

The common shares were fair valued using the company’s market price on closing date and reflects a discount for the common shares issued to MassMutual (75,563,041 shares) with a two-year lock-up period, resulting in a value of approximately $19.195 per share. Common shares issued to OppenheimerFunds employee shareholders (153,574 shares) were valued at the market price on closing date, which was $20.42.


(4)	The preferred shares were fair valued using a discounted cash flow model, resulting in a value of $1,000 per share.


(5)	Other consideration primarily consists of the fair value of the vested portion of replacement employee common share-based awards.

The changes in the carrying amount of goodwill from December 31, 2019 to March 31, 2020 are primarily due to the OppenheimerFunds acquisition. See Note 6 -- "Goodwill" for additional details regarding changes in goodwill.

Transaction and integration costs related to the OppenheimerFunds acquisition included within the Transaction, integration, and restructuring line item on the Condensed Consolidated Statements of Income were $71.1 million, for the three months ended March 31, 2020. Included in this amount was a loss of $7.3 million, representing the post-acquisition activity and related costs for the MLP fund-related liability discussed above.

Supplemental Pro Forma Information

The following pro forma summary presents consolidated information of the company as if the business combination had occurred on January 1, 2019, the earliest period presented herein.



	Three months ended March 31,
$ in millions	2019
Operating revenues	1,720.8
Net income	215.6

The pro forma adjustments include dividends on preferred shares, transaction costs, and adjustments to depreciation and intangible asset amortization expense. Cost savings or operating synergies expected to result from the acquisition are not included in the pro forma results. These pro forma results are not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations.