3.Business Acquisitions

 

Acquisition of Klein Decisions, Inc.

 

On July 1, 2014, ERS, LLC completed the acquisition of Klein.  In accordance with the stock purchase agreement, ERS, LLC acquired all of the outstanding shares of Klein for cash consideration of approximately $1,288, a promissory note in the amount of $1,500, and estimated fair value of $3,285 in contingent consideration (with a minimum guaranteed amount of $1,175), to be paid over three years.  The promissory note was paid by ERS, LLC on July 31, 2014.  Klein develops dynamic decision systems that incorporate investor preferences, goals, and priorities into the investment process. ERS, LLC acquired Klein for its capabilities in delivering personal participant solutions, as well as its personnel to further build out ERS’s business of serving advisors who support the small retirement plan market.  The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, which relate to an increase in future ERS, LLC revenues as a result of leveraging Klein’s systems and expertise of its employees.  The goodwill is deductible for income tax purposes.

 

The consideration in the acquisition was as follows:

 

 

The contingent consideration liability of $3,285 is the present value of an undiscounted liability of $3,520, applying a discount rate of 3% and is considered a Level 3 fair value measurement as described in Note 8. Payments will be made at the end of three twelve month closing periods. The future undiscounted payments are anticipated to be $332 on July 31, 2015, $906 on July 31, 2016 and $2,282 on July 31, 2017.  Changes to the estimated fair value of the contingent consideration are recognized in earnings of the Company. No change in the estimated fair value of the contingent consideration was determined for the three month period ended September 30, 2014.

 

The estimated fair values of the contingent consideration, deferred income taxes, and intangible assets are provisional and are based on the information that was available as of the acquisition date. The Company believes the information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair values reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of contingent consideration, deferred income taxes and intangible assets, and complete the acquisition accounting as soon as practicable but no later than December 31, 2014.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

A summary of intangible assets acquired, estimated useful lives and amortization method at the date of acquisition is as follows:

 

 

The results of Klein operations are included in the condensed consolidated statements of operations beginning July 1, 2014.  The results are not material to the Company.

 

For the three and nine months ended September 30, 2014, acquisition related costs for Klein totaled $112 and $309, respectively, and are included in general and administration expenses.

 

On July 9, 2014, ERS, LLC accepted the subscription of former owners of Klein (the “Klein Parties”) to purchase an 11.7% ownership interest of ERS, LLC for $1,500.  The Klein Parties have the right to require ERS, LLC to repurchase units issued pursuant to the subscription anytime between 18 and approximately 36 months after July 1, 2014 for the amount of $1,500.  This purchase obligation is guaranteed by the Company and is reflected outside of permanent equity in the condensed consolidated balance sheet. After taking into account the subscription of the Klein Parties, the Company’s ownership interest in ERS, LLC is 57%.

 

Acquisition of Wealth Management Solutions

 

On July 1, 2013, the Company acquired the Wealth Management Solutions (“WMS”) division of Prudential Investments LLC. In accordance with the purchase agreement, the Company acquired substantially all of the assets and assumed certain liabilities of WMS for total consideration of $24,730. WMS is a provider of technology solutions that enables financial services firms to develop and enhance their wealth management offerings. The Company acquired WMS to better serve the wealth management needs of the bank channel, deepen the Company’s practice management capabilities, and benefit from the operational leverage resulting from consolidating WMS’s business onto the Company’s unified wealth management platform.

 

The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to an increase in future revenues as a result of potential cross selling opportunities, as well as lower future operating expenses, including a reduction in headcount from pre-acquisition levels and lower technology platform-related costs due to the migration of WMS’s clients to the Envestnet technology platform.  The goodwill is also related to the knowledge and experience of the workforce in place.

 

The consideration in the acquisition was as follows:

 

 

In connection with the acquisition of WMS, the Company is required to pay Prudential Investments contingent consideration of $6,000 per year for three years, based upon WMS’s annualized net revenue relative to a target of $28,000 per year, with lower payments for performance below the target and higher payments for performance above the target, subject to an aggregate maximum of $23,000. The Company recorded a liability as of the date of acquisition of $15,738, which represented the estimated fair value of contingent consideration on the date of acquisition and is considered a Level 3 fair value measurement as described in Note 8.

 

The estimated fair value of contingent consideration as of September 30, 2014 was $11,791. This amount is the present value of an undiscounted liability of $13,227, applying a discount rate of 10%. Payments will be made at the end of three twelve month closing periods. The first undiscounted payment of $6,000 was paid on August 12, 2014.  The second and third undiscounted payments are anticipated to be $7,066 on August 15, 2015 and $6,161 on August 15, 2016. Changes to the estimated fair value of the contingent consideration are recognized in earnings of the Company.  During the three months ended September 30, 2014, the Company recorded a fair value adjustment to increase the contingent consideration liability by $118 as a result of an increase in the revenue assumptions. This adjustment is included in general and administration expense in the condensed consolidated statements of operations. For the nine months ended September 30, 2014, the Company recorded a fair value adjustment to decrease the contingent consideration arrangement by $342 (Note 8) as a result of a decrease in the revenue assumptions for years 2 and 3. This adjustment is included in general and administration expense in the condensed consolidated statements of operations.

 

For the three and nine months ended September 30, 2014, the Company recognized imputed interest expense on contingent consideration of $284 and $1,108, respectively.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

A summary of intangibles assets acquired, estimated useful lives and amortization method at the date of acquisition is as follows:

 

 

For the three and nine months ended September 30, 2014, acquisition related costs for WMS totaled $0 and $95, respectively, and are included in general and administration expenses. For the three and nine months ended September 30, 2013, acquisition related costs for WMS totaled $197 and $844, respectively, and are included in general and administration expenses.

 

Pro forma results for Envestnet, Inc. giving effect to the WMS acquisition

 

The following pro forma financial information presents the combined results of operations of Envestnet and WMS, acquired on July 1, 2013, for the nine months ended September 30, 2013. The pro forma financial information presents the results as if the acquisition had occurred as of the beginning of 2013.  The results of Klein are not included in the pro forma presented below as the Klein acquisition was not material to the Company.

 

The unaudited pro forma results presented include amortization charges for acquired intangible assets, imputed interest expense, stock-based compensation expense and the related tax effect on the aforementioned items.

 

Pro forma financial information for the nine months ended September 30, 2013 is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisition had taken place as of the beginning of 2013.