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Acquisitions | 3 Months Ended
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Mar. 31, 2019
Business Combinations [Abstract] |
Acquisitions | 2. Acquisitions Acquisition of Pacific Union Financial, LLC On February 1, 2019, the Company completed the acquisition of all the limited liability units of Pacific Union Financial, LLC (“Pacific Union”), a California limited liability company. The purchase price was estimated to be $116, which is subject to adjustment. Pacific Union was a privately-held company that was engaged in the origination as well as servicing of residential mortgage loans, and operated throughout the United States. The acquisition allows the Company to expand its servicing portfolio and increase its mortgage lending volume and capabilities. The acquisition has been accounted for in accordance with Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 (“ASC 805”), Business Combinations, using the acquisition method of accounting. Under the acquisition method of accounting, the Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on its estimated fair values as of the acquisition date. The determination of fair value estimates requires management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments. The Company’s estimates are subject to change as the Company obtains additional information and finalizes its review of estimates during the measurement period (up to one year from the acquisition date). The primary areas of the preliminary allocation of fair value of consideration transferred that are not yet finalized relate to the fair value of mortgage servicing rights, loans held for sale, advances and other receivables and payables and accrued liabilities as the Company continues to evaluate the underlying inputs and assumptions that are being used in fair value estimates. Based on the preliminary allocation of fair value, goodwill of $29 has been recorded, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of the liabilities assumed. The goodwill is primarily attributable to the assembled workforce and synergies with the Company’s current operations. The goodwill is assigned to the Origination and Servicing segments based on expected cash flows and is expected to be deductible for tax purposes.
Preliminary Estimated Fair Value of Net Assets Acquired: |
Cash and cash equivalents | $ | 37 |
Restricted cash | 2 |
Mortgage servicing rights | 271 |
Advances and other receivables | 84 |
Mortgage loans held for sale | 536 |
Mortgage loans held for investment | 1 |
Property and equipment | 10 |
Other assets | 483 |
Fair value of assets acquired | 1,424 |
Notes payable(1) | 294 |
Advance facilities | 13 |
Warehouse facilities | 393 |
Payables and other liabilities | 519 |
Other nonrecourse debt | 129 |
Fair value of liabilities assumed | 1,348 |
Total fair value of net tangible assets acquired | 76 |
Intangible assets: |
Customer relationships(2) | 11 |
Preliminary goodwill | 29 |
| $ | 116 |
(1) | Notes payables was subsequently paid off in February 2019 after the consummation of the acquisition.
(2) | The estimated fair values for customer relationships were measured using the excess earnings method and were determined to have a remaining useful life of 10 years.
The purchase price allocation has not been finalized as of March 31, 2019, as the Company continues to analyze respective valuations of acquired assets and assumed liabilities as specified above. The Company incurred total acquisition costs of $2 during the three months ended March 31, 2019, of which $1 are included in salaries, wages and benefits expense and $1 in general and administrative expense in the Company’s consolidated statements of operations. The acquisition costs were primarily related to legal, accounting and consulting services. For the three months ended March 31, 2019, the operations contributed by this acquisition generated consolidated total revenues of $39 and income before income tax of $14, which are reported in the Company’s consolidated statements of operations. The following unaudited pro forma financial information presents the combined results of operations for the three months ended March 31, 2019 as if the transaction had occurred on January 1, 2019.
| Three Months Ended March 31, 2019
Pro forma total revenues | $ | 269 |
Pro forma net loss | $ | (184 | )
Acquisition of Nationstar Mortgage Holdings Inc. Upon the Merger with Nationstar on July 31, 2018, each share of Nationstar’s common stock issued and outstanding immediately prior to the Effective Time was converted into the right to receive, at the election of the holder of such share, (i) $18.00 per share in cash, without interest, or (ii) 12.7793 shares (prior to the 1-for-12 reverse stock split) of validly issued, fully paid and nonassessable shares of WMIH common stock (the “Merger Consideration”). The Merger Consideration was subject to automatic proration and adjustment pursuant to the Merger Agreement to ensure that the total amount of cash paid (excluding cash paid in lieu of fractional shares) equaled approximately $1,226. Pursuant to the Merger Agreement, immediately prior to the Effective Time, subject to certain exceptions, (i) each then-outstanding share of Nationstar restricted stock automatically vested in full and was converted into the right to receive the Merger Consideration, as elected by the holder thereof, and (ii) each then-outstanding Nationstar restricted stock unit, whether vested or unvested, was automatically vested in full, assumed by WMIH and converted into a WMIH restricted stock unit entitling the holder thereof to receive upon settlement the Merger Consideration, as elected by the holder. Upon closing the Merger, all outstanding WMIH Series B Preferred Stock and all outstanding warrants to purchase shares of WMIH common stock were converted into common stock of WMIH. Total purchase price was approximately $1,777, consisting of cash paid of $1,226 and transferred stock valued at $551. The purchase price was funded from available cash on hand and borrowings under senior unsecured notes (see discussion below). Prior to the acquisition, Nationstar was a publicly-held company that earned fees through the delivery of servicing, origination and transaction-based services related primarily to single-family residences throughout the United States. This acquisition marks the Company’s initial entry into the mortgage servicing industry that Nationstar operates in and is consistent with the Company’s business strategy. On July 13, 2018, Merger Sub closed the offering of $950 aggregate principal amount of 8.125% Notes due 2023 (the “2023 Notes”) and $750 aggregate principal amount of 9.125% Notes due 2026 (the “2026 Notes” and, together with the 2023 Notes, the “New Notes”). The proceeds from the New Notes were used, together with the proceeds from the issuance of the Company’s common stock and the Company’s cash and restricted cash on hand, to consummate the Company’s acquisition of Nationstar and the refinancing of certain of Nationstar’s existing debt and to pay related fees and expenses. At the consummation of the acquisition, Merger Sub merged with and into Nationstar, with Nationstar continuing as a wholly-owned subsidiary of the Company. After the Merger, Nationstar assumed all of Merger Sub’s obligations under the New Notes. The acquisition has been accounted for in accordance with ASC 805, Business Combinations, using the acquisition method of accounting. Under the acquisition method of accounting, the Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The Company recorded preliminary goodwill of $65, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of the liabilities assumed. The goodwill is primarily attributable to the assembled workforce and synergies from the future growth and strategic advantages in the mortgage industry. The entire goodwill is assigned to the Servicing segment and will not be deductible for tax purposes. The table below presents the calculation of aggregate purchase price.
Purchase Price: |
Converted WMIH common shares (prior to reverse stock split) in millions | 394 |
Price per share, based on price of $1.398 for WMIH stock on July 31, 2018 | $ | 1.398 |
Purchase price from common stock issued | 551 |
Purchase price from cash payment | 1,226 |
Total purchase price | $ | 1,777 |
The allocation of the fair value of the acquired business was based on preliminary valuations of the estimated net fair value of the assets acquired. The determination of fair value estimates requires management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments. The Company’s estimates are subject to change as the Company obtains additional information and finalizes its review of estimates during the measurement period (up to one year from the acquisition date). The primary areas of the preliminary allocation of fair value of consideration transferred that are not yet finalized relate to the fair value of advances and other receivables and payables and accrued liabilities. The Company will record any adjustments to the preliminary fair value estimates in the reporting period in which the adjustments are determined. Fair value adjustments based on updated estimates could materially affect the goodwill recorded on the acquisition. The preliminary allocation of the purchase price to the acquired assets and liabilities is as follows:
Preliminary Estimated Fair Value of Net Assets Acquired: |
Cash and cash equivalents | $ | 166 |
Restricted cash | 430 |
Mortgage servicing rights | 3,422 |
Advances and other receivables | 1,262 |
Reverse mortgage interests | 9,189 |
Mortgage loans held for sale | 1,514 |
Mortgage loans held for investment | 125 |
Property and equipment | 96 |
Other assets | 610 |
Fair value of assets acquired | 16,814 |
Unsecured senior notes | 1,830 |
Advance facilities | 551 |
Warehouse facilities | 2,701 |
Payables and other liabilities | 1,352 |
MSR related liabilities—nonrecourse | 1,065 |
Mortgage servicing liabilities | 123 |
Other nonrecourse debt | 7,583 |
Fair value of liabilities assumed | 15,205 |
Total fair value of net tangible assets acquired | 1,609 |
Intangible assets(1) | 103 |
Preliminary goodwill | 65 |
| $ | 1,777 |
(1) | The following intangible assets were acquired in the Nationstar acquisition.
| Useful Life (Years) |  | Fair Value
Customer relationships(i) | 6 |  | $ | 61 |
Tradename(ii) | 5 |  | 8 |
Technology(ii) | 3-5 |  | 11 |
Internally developed software(iii) | 2 |  | 23 |
Total |  |  | $ | 103 |
(i) | The estimated fair values for customer relationships were measured using the excess earnings method.
(ii) | The estimated fair values for tradename and technology were measured using the relief-from-royalty method. This method assumes the tradename and technology have value to the extent the owner is relieved of the obligation to pay royalties for the benefits received from these assets.
(iii) | The estimated fair values for internally developed software were measured using the replacement cost method.
The preliminary allocation of fair value as of December 31, 2018 resulted in goodwill of $10. As previously disclosed, the fair value related to reverse mortgage assets and liabilities had not been finalized. During the first quarter of 2019, the Company obtained additional information in finalizing its review regarding a market participant view of the cost to service assumption related to the valuation of reverse mortgage assets and liabilities. This additional information was used in finalizing the Company’s review of the fair value of the reverse mortgage assets and liabilities and resulted in a reduction of $24 in reverse mortgage interests, a reduction of $6 in reverse mortgage servicing rights and an increase of $37 in mortgage servicing liabilities. In addition, a reduction of $12 in payables and other liabilities was recorded for the tax impact related to the revised valuation, for a total adjustment to goodwill of $55. As a result of the revised fair value, the Company recorded $7 to service related, net revenue and $1 to interest income, for a total $8 increase to earnings in the consolidated statement of operations for the three months ended March 31, 2019. Goodwill totaled $65 as of March 31, 2019 after taking into account these measurement period adjustments. The purchase price allocation has not been finalized as of March 31, 2019, as the Company continues to analyze the valuations assigned to the acquired assets and assumed liabilities. During the three months ended March 31, 2019, the Company finalized its valuation of reverse mortgage assets and liabilities related to loan specific cash flows. However, the Company has not yet finalized valuation related to advances and other receivables recorded within reverse mortgage interest primarily as unsecuritized interests in addition to payables and accrued liabilities. WMIH incurred total acquisition costs of $92 prior to the consummation of the Merger, of which $4 was incurred in the three months ended March 31, 2018. The acquisition costs were primarily related to legal, accounting and consulting services and were expensed as incurred through July 31, 2018. Included in the total acquisition costs was a transaction fee of $25 to KKR Capital Markets LLC (“KCM”), an affiliate of KKR Wand Investors Corporation, which is WMIH’s largest stockholder, for acting as a non-exclusive financial advisor to WMIH with respect to the Merger and an arrangement fee of $7 to KCM for acting as a placement agent with respect to a bridge financing facility in connection with the Merger that was not executed. In addition, WMIH incurred $38 of costs related to borrowings under the Notes, which was capitalized in debt costs. WMIH also paid KCM a deferred fee of $8, which initially reduced the carrying value of the Series B Preferred Stock. This fee was payable in connection with the conversion of Series B Preferred Stock to WMIH’s common stock upon consummation of the Merger. The Predecessor incurred total acquisition costs of $27 in connection with the Merger. Included in the Predecessor’s consolidated statements of operations for the three months ended March 31, 2018 were $3 of acquisition costs incurred by Nationstar. Included in the Company’s consolidated statements of operations for the three months ended March 31, 2019 were $1 of acquisition costs related to the compensation arrangements incurred by the Company related to the Merger. Acquisition of Assurant Mortgage Solutions (“AMS”) On August 1, 2018, Xome Holdings LLC, a wholly-owned subsidiary of the Company, acquired AMS for $38 in cash with additional consideration dependent on the achievement of certain future performance targets, which was initially estimated at $15 as of December 31, 2018. Total purchase price was estimated at $53. The acquisition expands Xome’s product footprint and grows its third-party client portfolio across its valuation, title and field services businesses. The Company finalized its purchase price allocation and recorded intangible assets of $24 and goodwill of $13 in 2018. The Company expects entire goodwill to be deductible for tax purposes. Under ASC 805, Business Combinations, the contingent consideration was remeasured to fair value of $4 at March 31, 2019. The $11 change in the fair value was included in other income (expenses) within the consolidated statement of operations for the three months ended March 31, 2019.

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