Business Combinations

2015 Acquisition Activity

Mach4 Acquisition

On April 21, 2015, the Company completed its acquisition of Mach4, a privately held German limited liability company with its registered office in Bochum, Germany pursuant to a share purchase agreement (the “Mach4 Agreement”), under which Omnicell International, Inc., a wholly-owned subsidiary of Omnicell Inc., purchased the entire issued share capital of Mach4 (the “Mach4 Acquisition”).

Mach4 manufactures robotic dispensing systems used by retail and hospital pharmacies and the Mach4 acquisition provides the Company with a more robust product offering that is intended to be leveraged to create opportunities to sell additional Omnicell medication cabinets. The robotic storage and dispensing product offering provides the Company with a solution to better compete for international market share.

Pursuant to the terms of the Mach4 Agreement, the Company paid approximately $17.3 million in cash after adjustments provided for in the Mach4 Agreement, of which $2.7 million was placed in an escrow fund, which will be distributed to Mach4's former stockholders subject to claims that we may make against the escrow fund with respect to indemnification and other claims within 18 months after the closing date of this transaction.

Avantec Acquisition

On April 30, 2015, the Company completed the acquisition of Avantec, the privately-held distributor of the Company’s products in the United Kingdom, pursuant to a share purchase agreement (the “Avantec Agreement”). Pursuant to the Avantec Agreement, the Company acquired the remaining 85% of issued and outstanding ordinary shares of Avantec that was not previously owned by the Company. Avantec develops medication and supply automation products that complement the Company's solutions for configurations suited to the United Kingdom marketplace, and had been the exclusive distributor of the Company's medication and supply automation solutions since 2005 in the United Kingdom.

Pursuant to the terms of the Avantec Agreement, the Company agreed to pay $12.0 million in cash (the “Purchase Consideration”) and potential earn-out payments of up to $3.0 million payable after December 31, 2015 and an additional $3.0 million payable after December 31, 2016, based on bookings targets. The fair value of these potential earn-out payments as of the acquisition date was $5.6 million. Pursuant to the terms of the Avantec Agreement, the Company retained $1.8 million of the Purchase Consideration to be held to settle any future indemnification claims within 18 months period that the Company may make following the closing.

The fair value of the contingent consideration liability related to Avantec is revalued at each reporting date or more frequently if circumstances dictate. Changes in the fair value of this obligation are recorded as income or expense within other expense in the Company's Consolidated Statements of Operations. The significant unobservable inputs used in the fair value measurement of the contingent consideration are the achievement of booking targets and the discount rate. Significant increases or decreases in any of those inputs in isolation would result in a significantly lower or higher fair value measurement.

Prior to the Avantec Acquisition, the Company accounted for its 15% ownership interest in Avantec as an equity-method investment. The Avantec acquisition date carrying book value of the Company's previous equity interest was $1.3 million. This transaction was accounted for as a step acquisition, which required the Company to re-measure its previously held 15% ownership interest to fair value and record the difference between the fair value and carrying value as a gain. The fair value of the equity investment was determined to be $4.7 million which resulted in a gain of $3.4 million.

Both of the above acquired companies are included in the Company's Automation and Analytics segment.

The Company accounted for the transactions above under the provisions of ASC 805. Accordingly, the estimated fair value of the consideration transferred to purchase the acquired companies is allocated to the assets acquired and the liabilities assumed based on their respective fair values. The Company has made significant estimates and assumptions in determining the allocation of the acquisition consideration.

The purchase price allocations are subject to certain post-closing working capital adjustments for the acquired current assets and current liabilities of both acquisitions at their respective acquisition dates. The total consideration and the allocation of consideration to the individual net assets is preliminary, as there are remaining uncertainties to be resolved, including the settlement of the final net working capital adjustment for each.

The Company's preliminary allocation of the total purchase price for each transaction is summarized below:



	Mach4		Avantec		Total
	(In thousands)
Cash	$	397	$	3,392	$	3,789
Accounts receivable	3,743		3,607		7,350
Inventory	3,580		1,428		5,008
Deferred tax assets and other current assets	368		89		457
Total current assets	8,088		8,516		16,604
Property and equipment	463		—		463
Intangibles	7,710		6,341		14,051
Goodwill	10,591		15,606		26,197
Other non-current assets	52		—		52
Total assets	26,904		30,463		57,367
Current liabilities	3,684		4,125		7,809
Non-current deferred tax liabilities	2,564		1,269		3,833
Deferred service revenue and gross profit	2,314		928		3,242
Other non-current liabilities	1,056		—		1,056
Total purchase price	17,286		24,141		41,427
Total purchase price, net of cash received	$	16,889	$	20,749	$	37,638

Identifiable intangible assets

Intangible assets acquired and their respective estimated remaining useful lives over which each asset will be amortized are as follows:



	Mach4			Avantec
	Fair value		Weighted average useful life	Fair value		Weighted average useful life
	(In thousands)		(In years)	(In thousands)		(In years)
Developed technology	$	3,290	8	$	—	—
Trade name	850		6	92		2
Customer relationships	3,570		10	5,834		12
Backlog	—		—	415		2
Total purchased intangible assets	$	7,710		$	6,341

Developed technology represents completed technology that has reached the technological feasibility and/or is currently offered for sale to Mach4 customers. The fair value is determined based on the relief from royalty method under the income approach, which requires the Company to estimate a reasonable royalty rate, identify relevant projected revenues and expenses, and select an appropriate discount rate. A royalty rate of 5% was used to value the developed technology. The after-tax cash flows were discounted to present value utilizing a 17.5% discount rate, which is based on the Company's company-wide required return for this acquisition plus a discount of 1.5% to account for the unique riskiness of the asset. The developed technology had a fair value of $3.3 million and had an estimated economic life of eight years based on estimated technological obsolescence and is being amortized on an accelerated basis.

Trade name represents the fair value brand recognition that was determined using the relief-from-royalty method under the income approach. A royalty rate of 1% and 2% was used to value the trade names of Avantec and Mach4, respectively. The value of trade names of $0.1 million for Avantec is being amortized on straight-line method and $0.9 million for Mach4 is being amortized on an accelerated basis.

Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to existing customers of the acquired company. The fair value of the customer relationships is determined based on the excess earnings method under the income approach that resulted in a value of $3.6 million for Mach4 and $5.8 million for Avantec and has been amortized over their useful lives on accelerated basis.

Backlog represents the fair value of sales order backlog as of the valuation date and its fair value is determined based on the excess earnings method under the income approach and is being amortized on straight-line method.

Goodwill

The goodwill arising from these acquisitions is primarily attributed to sales of future products and services and the assembled workforce. Goodwill is not deductible for tax purposes. Goodwill is not being amortized but is reviewed annually for impairment or more frequently if impairment indicators arise, in accordance with authoritative guidance.

Pro forma financial information

The following table presents certain unaudited pro forma information for illustrative purposes only, for fiscal 2015 and fiscal 2014 as if Mach4 and Avantec had been acquired on January 1, 2014. The unaudited estimated pro forma information combines the historical results of Mach4 and Avantec with the Company's consolidated historical results and includes certain adjustments reflecting the estimated impact of fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisitions taken place on January 1, 2014. Additionally, the pro forma financial information does not include the impact of possible business model changes between Mach4, Avantec and the Company. The Company expects to achieve further business synergies, as a result of the acquisitions that are not reflected in the pro forma amounts that follow. As a result, actual results will differ from the unaudited pro forma information presented (in thousands, except per share data):



	Twelve months ended December 31,
	2015		2014
	(In thousands, except per share data)
Pro forma net revenues	$	491,533	$	468,147
Pro forma net income	31,397		32,356
Pro forma net income per share basic	0.88		0.91
Pro forma net income per share diluted	0.86		0.88

Total revenues for Mach4 and Avantec recorded in fiscal year 2015 consolidated financial statements since the acquisition date were $11.2 million and $8.7 million, respectively. Total operating losses for Mach4 and Avantec recorded in fiscal year 2015 consolidated financial statements since the acquisition date were $2.2 million and $0.9 million, respectively.

2014 Acquisition Activity

On August 22, 2014, the Company completed its acquisition of Surgichem, a wholly-owned subsidiary of Bupa Care Homes (CFG) Plc ("Bupa"). In exchange for all of the voting equity interests of the acquired company, the Company paid a total purchase price of $20.7 million in cash, net of $0.2 million of cash acquired. This acquisition will assist U.K. healthcare professionals and caregivers seeking to improve patient outcomes, reduce medication errors and lower costs by effectively managing compliance to prescribed medication regimes in their mission to extend patient health and satisfaction through convenient, effective medication adherence solutions. Surgichem is being integrated with the Company’s existing U.K. business, MTS, a leading supplier of medication adherence packaging solutions.

The following table presents the purchase price allocation included in the Company's Consolidated Balance Sheets:



	(In thousands)
Cash	$	153
Accounts receivable	2,462
Inventory	2,190
Deferred tax assets and other current assets	361
Total current assets	5,166
Property and equipment	164
Intangibles	5,730
Goodwill	12,112
Total assets	23,172
Current liabilities	1,191
Long-term deferred tax liabilities	1,104
Total purchase price	$	20,877

Acquired intangible assets. The fair value of $5.4 million for acquired customer relationships was determined based on an income approach using the discounted cash flow method. The fair value of $0.3 million for the trade name was determined using the relief-from-royalty approach. Customer relationships are amortized over their estimated useful lives of 18 years and the trade name is amortized over its estimated useful life of approximately 1 year.

Goodwill. The purchase price allocation resulted in goodwill of $12.1 million, which represents sales of future products and services and the assembled workforce of Surgichem. The Company believes the acquisition enhances its offerings and diversifies its revenue mix providing a more robust product and service solution to its current customers while expanding the Company’s international presence. The Company considered these factors as supporting the amount of goodwill recorded. The amortization of intangible assets and goodwill is not deductible for tax purposes.

Surgichem generated revenue of $4.6 million and losses from operations of $0.1 million since the acquisition date for the year ended December 31, 2014. Surgichem revenue and losses from operations were $13.3 million (including $4.6 million mentioned above) and $11.9 million for the years ended December 31, 2014 and December 31, 2013, respectively. Results of operations for Surgichem have been included as a part of the Company's Medication Adherence segment, and supplemental pro forma results of operations for the prior periods have not been presented, as the effect of the acquisition was not material to the Company's consolidated financial results.