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Business Combinations | 9 Months Ended
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Sep. 30, 2018
Business Combinations [Abstract] |
Business Combinations | Business Combinations On April 12, 2018, Federated entered into an agreement to acquire a controlling interest in Hermes from BT Pension Scheme (BTPS). The addition of London-based Hermes, which has had multi-year significant asset growth, will further accelerate Federated's growth in markets outside of the U.S. On July 2, 2018, Federated completed, effective as of July 1, 2018, the acquisition of a controlling interest in Hermes (Hermes Acquisition). BTPS retained a 29.5 percent interest in Hermes and contributed the remaining 10.5 percent interest into an Employee Benefit Trust (EBT) for the benefit of certain members of Hermes' management and other key employees under a long-term incentive plan (LTIP). Federated paid a total of £260.7 million ($344.3 million). Federated funded the transaction through a combination of cash and an $18.0 million drawdown from its existing revolving credit facility (see Note (11) for additional information). Federated and BTPS entered into a Put and Call Option Deed pursuant to which Federated has a right to exercise a call option to acquire BTPS's remaining 29.5 percent interest in Hermes at fair value and BTPS has a right to exercise a put option to sell its remaining interest in Hermes to Federated at fair value, after the third, fourth or fifth anniversaries, and subject to certain contingencies, the sixth anniversary, of the date of the purchase agreement. Federated does not consider BTPS's 29.5 percent noncontrolling interest in Hermes to be permanent equity, due to it being redeemable at the option of BTPS and therefore, outside of Federated's control. Hermes granted equity awards from the EBT in the form of restricted nonpublic subsidiary stock pursuant to the LTIP to certain members of Hermes management and other key employees. These awards, which are subject to continued service vesting requirements, vest over a period of three to five years. At various predetermined dates, but no earlier than 9 months after vesting, award holders have a right to exercise a put option to sell shares to Federated at fair value and Federated has a right to exercise a call option to acquire shares at fair value. The grant date fair value of the awards is recognized as Compensation and Related expense in the Consolidated Statements of Income over the relevant vesting periods, with a corresponding adjustment to Redeemable Noncontrolling Interest in Subsidiaries in the Consolidated Balance Sheets. As a result of the grant of the equity awards in a nonpublic consolidated subsidiary under the terms of the LTIP and EBT, the shares are not included in the attribution of the subsidiary's income and losses to noncontrolling interest holders until the awards vest. Therefore, Federated will initially recognize the fair value of 33 percent of Hermes as Redeemable Noncontrolling Interest in Subsidiaries on the Consolidated Balance Sheets. The attribution of the subsidiary's income and loss is recognized in Net Income Attributable to the Noncontrolling Interests in Subsidiaries on the Consolidated Statements of Income and is expected to fluctuate as the LTIP awards vest and put/call options are exercised. Federated's diluted earnings per share calculation is adjusted for the proportionate share of net income related to the unvested equity awards in a nonpublic consolidated subsidiary (see Note (14) for additional information). As of September 30, 2018, Redeemable Noncontrolling Interest in Subsidiaries related to Hermes was $172.4 million. Federated has expensed $14.5 million in transaction costs directly attributable to the Hermes Acquisition. Of this amount, $12.7 million has been expensed to date in 2018, primarily recorded in Professional Service Fees on the Consolidated Statements of Income. The transaction costs exclude a derivative loss (see Note (10) for additional information) and a $1.7 million foreign exchange gain recognized in the second quarter of 2018 as a result of holding British pound sterling at quarter end. Federated anticipates future transaction costs of approximately $1 million may be recorded in the fourth quarter of 2018. Actual results may differ from this estimate, and such difference may be material to the Consolidated Financial Statements. Federated has performed a valuation of the fair market value of the Hermes Acquisition. Due to the timing of the acquisition and status of the valuation work, the purchase price allocation for all assets and liabilities acquired is preliminary. Although preliminary results of the valuation are reflected in the Consolidated Financial Statements as of September 30, 2018 and for the three and nine months then ended, the final purchase price allocation may reflect adjustments to this preliminary valuation and such adjustments may be material. The following table summarizes the allocation of the preliminary purchase price as of the acquisition date:
(in millions) |  |
Cash and Cash Equivalents |  | $ | 175.8 |
Other Current Assets 1 |  | 53.7 |
Goodwill 2 |  | 161.2 |
Intangible Assets 3 |  | 271.7 |
Other Long-Term Assets 4 |  | 34.7 |
Less: Long-Term Deferred Tax Liability, net |  | (20.9 | )
Less: Liabilities Acquired 5 |  | (162.3 | )
Less: Fair Value of Redeemable Noncontrolling Interest in Subsidiary 6 |  | (169.6 | )
Total Purchase Price Consideration |  | $ | 344.3 |
1 | Includes $31.9 million of receivables, substantially all of which has been collected as of September 30, 2018.
2 | The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities from future investors and the assembled workforce of Hermes. In this instance, goodwill is not deductible for tax purposes.
3 | Includes $92.4 million for customer relationships with a weighted-average useful life of 8.4 years, $130.2 million for indefinite-lived renewable investment advisory contracts and $49.1 million for an indefinite-lived trade name, all of which are recorded in Intangible Assets, net on the Consolidated Balance Sheets.
4 | Includes $11.2 million of property and equipment.
5 | Includes $130.3 million related to accrued compensation and benefits.
6 | The fair value of the noncontrolling interest was determined utilizing the market approach and consideration of the overall business enterprise value.
The financial results of Hermes have been included in Federated's Consolidated Financial Statements from the July 1, 2018 effective date of the acquisition. For the three months ended September 30, 2018, Hermes earned revenue of $49.7 million and net income of $5.7 million (which excludes acquisition-related intangible amortization and amounts attributable to the noncontrolling interests). The following table summarizes unaudited pro forma financial information assuming the Hermes Acquisition occurred at the beginning of the periods presented. This pro forma financial information is for informational purposes only and is not indicative of actual results that would have occurred had the Hermes Acquisition been completed on the assumed dates and it is not indicative of future results. In addition, the following pro forma financial information does not reflect the realization of any cost savings (nor does management expect to realize any cost savings) or other synergies from the Hermes Acquisition following the completion of the business combination. The pro forma results include adjustments for the effect of acquisition-related expenses (including the loss on foreign currency forward transactions noted below, compensation and related expense, income tax expense and amortization related to newly acquired intangibles) as well as adjustments to conform to Federated's U.S. GAAP accounting policies.
| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
(in millions) | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
Revenue | $ | 308.6 |  |  | $ | 317.1 |  |  | $ | 923.3 |  |  | $ | 951.5 |
Net Income 1 | $ | 59.6 |  |  | $ | 76.5 |  |  | $ | 179.9 |  |  | $ | 229.6 |
1 | The nine months ended September 30, 2018 excludes a $29.0 million loss on foreign currency forward transactions entered into in order to hedge against foreign exchange rate fluctuations associated with the payment for the Hermes Acquisition.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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