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CVS Caremark Corporation (CVS)
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CVS » Topics » Business Combinations

This excerpt taken from the CVS 8-K filed Feb 13, 2007.
Business Combinations, CVS is treated as the acquiror of Caremark for accounting purposes. Accordingly, the combined company will allocate the purchase price paid by CVS to the fair value of the Caremark assets acquired and liabilities assumed. Due to legal restrictions, many of the details concerning individual assets and liabilities cannot be disclosed between CVS and Caremark prior to the merger’s completion. Therefore, the pro forma presentation presumes that the historical value of Caremark’s tangible assets and liabilities approximates fair value. Additionally, the allocation of purchase price to acquired intangible assets is preliminary and subject to the final outcome of independent analyses to be conducted after the completion of the merger. The residual amount of the purchase price has been allocated to goodwill. The actual amounts recorded when the merger is completed may differ materially from the pro forma amounts presented herein.

Aggregate purchase price of Caremark common stock (1) $ 23,197.7  
Non-cash purchase price- fair value of stock options (2)   555.1  
Caremark Special Cash Dividend (3)   2,643.6  
Accrued transaction costs (4)   50.0  
   Aggregate consideration   26,446.4  
Book value of the net assets acquired as of September 30, 2006   344.4  
     Intangible assets, net (5)   1,244.4  
     Deferred Tax Liability (6)   (487.8 )
     Accrued Expenses (7)   (26.4 )
Goodwill $ 25,371.8  

(1) The aggregate purchase price of Caremark common stock is calculated as follows (in millions, except ratios and per share amounts):

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Exchange ratio   1.670
Average closing price per share of CVS common stock for the five trading days ending    
    February 9, 2007 (a) $ 33.02
Total purchase price per share   55.14
Caremark shares outstanding (September 30, 2006)   420.7
Total purchase price excluding fair value of stock options, Caremark Special Dividend and    
transaction Costs $ 23,197.7
  (a)

As a result of the amendment to the Waiver Agreement dated February 12, 2007 this calculation will be revised to reflect the average closing price per share of CVS common stock for the five trading days ending February 14, 2007.

     
(2)

At the effective time of the merger, Caremark stock options will be exchanged for stock options to purchase shares of CVS/Caremark common stock exercisable for that number of shares of CVS/Caremark common stock equal to the number of shares of Caremark common stock previously subject to the corresponding Caremark stock option multiplied by 1.670 at an exercise price per share equal to (1) the aggregate exercise price required to purchase all shares of Caremark common stock subject to the Caremark option before the completion of the merger divided by (2) the number of shares of CVS/Caremark common stock subject to the option after completion of the merger, rounded up to the nearest whole cent.

     
  The fair value of the options issued to Caremark optionees, net of the fair value of unvested options, represents additional purchase consideration. Substantially all options outstanding to Caremark optionees will accelerate vesting at the time of the merger, due to provisions of the underlying stock options plan, upon change of control. For purposes of the pro forma financial statements, it is assumed that the change in control provisions resulted in all options being fully vested as of the balance sheet date, September 30, 2006. The aggregate fair value of these options, for the purposes of the pro forma balance sheet, was calculated using the Black-Scholes option pricing model and following assumptions (in millions, except per share amounts, ratios and percentages):
     
Expected term (years)   1.75  
Risk free interest rate   4.75 %
Dividend yield   0.48 %
Expected volatility   21.40 %
Weighted average fair value   14.05  
Number of shares underlying options(i)   33.2  
Aggregate fair value allocated to purchase price $ 555.1  
(i) Number of shares underlying options was computed using the exchange ratio of 1.670:1 share based on Caremark’s options outstanding at September 30, 2006.
   
(3) Represents the Caremark special cash dividend in the amount of $6.00 per share to be paid pursuant to the terms as set forth in the CVS waiver and as described under “The Merger – Caremark Special Cash Dividend” as found in CVS’ Registration Statement No. l 333-139470 on Form S-4/A filed January 18, 2007. Such dividend is expected to be funded utilizing a combination of cash ($843.6 million) and long- term debt.
     
(4) Represents the estimated transaction costs related to the merger, which primarily includes investment banker fees and professional fees.
     
(5) Represents the adjustments to record intangible assets at estimated fair value, net of the elimination of historical Caremark amounts and includes customer relationships ($1,162.4 million net of $697.6 million of historical Caremark amounts), proprietary technology ($15.0 million) and trade names ($67.0 million).
     
(6) Represents the estimated deferred income tax benefit of the acquired intangible assets (other than goodwill).
     
(7) Represents estimated costs associated with provisions of employment agreements that would require future payment.
     
  (b) Intercompany elimination: Adjustments necessary to eliminate trade receivables and payables between CVS and Caremark related to CVS being included in Caremark’s pharmacy networks.

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