Keane's Acquisition of Metro Information Services (A) Case Solution

2. Could you explain why the price paid by Keane from the acquisition of Metro is calculated as described in Exhibit 4 of the case? What is Keane buying with the acquisition of Metro?

The acquisition transaction of Metro Information Services was to be accounted for via the Purchase Method. Keane had hired Morgan Stanley to be its financial advisor for the acquisition and had said that they would reimburse Stanley for $50,000 of expenses and would pay a $4 million fee upon completion of the merger. Under the terms of the merger, Keane would exchange 0.48 shares for each share of Metro. Additionally, Keane were to exchange share options of Metro worth $4.75 million. Additionally, legal and audit fees regarding the acquisition came out to be about $1 million. Keane’s average share price before and after the merger came out to be about $17.55 per share.

Hence, Keane acquired an average of 15.34 million shares of common stock. According to the share exchange of 0.48 shares for every share, Keane exchanged roughly 7,363,200 shares at $17.66 which amounted to around $130 million. The value of options assumed came to be around $4.75 million as stated above. The transaction fees consisted of the fees payable to Morgan Stanley, audit fees and legal fees which amounted to $5.1 million in total. Also, in the merger agreement, Keane had to make sure to disarm any potential conflicts of interest between the management and shareholders of Metro hence the executives of Metro were to derive financial benefits in the form of transaction bonuses amounting to $2.61 million. They were also to claim severance packages if their employment was terminated, but as there wasn’t any termination, no severance pay was given out.

Keane is buying net tangible assets worth $24.8 million, liabilities with fair value of $68 million and intangibles worth $32.1 million which included customer contracts and non-competing agreements. Also, while not noted in the financials, Keane was buying the management and professionals of Metro, as well as none of the executives were sacked after the acquisition.

3. Assume that Keane only identifies the assets described in page 5 of the case. How much of the acquisition price would be allocated to goodwill? What does goodwill include? What other intangible assets acquired from Metro would investors like to know about? Why doesn’t Keane allocate part of the acquisition price to those assets? What recommendations would you give to Keane’s CFO with respect to communicating to statement users the different components of goodwill and their valuation?

If Keane had only identified the assets and liabilities identified in page 5 of the case, the goodwill would come out to be $153 million as shown in the attached excel file. Goodwill includes mainly customer base contracts and the brand name of Metro Information Systems estimated at around $106 million. Investors would like to know specifically about the quality of professionals working in Metro, and how Metro had instilled loyalty in them, their vast and diverse network of 33 branches located throughout the United States and the increased synergy between the two companies as they would be able to gain around $15 million in cost savings by eliminating redundancies in their overall operating framework.