Acquisitions and Divestitures

Current Fiscal Year Acquisitions

Acquisition of Ruckus Wireless, Inc. (“Ruckus”)

On May 27, 2016 (“Acquisition Date”), the Company completed its acquisition of Ruckus, a public company incorporated in the state of Delaware, to strengthen its Internet Protocol (“IP”) Networking product portfolio by adding Ruckus’ wireless products and services to the Company’s networking solutions.

Pursuant to the terms of the Agreement and Plan of Merger entered into between the Company, Ruckus, and a Company subsidiary, Ruckus stockholders were entitled to receive $6.45 in cash and 0.75 shares of the Company’s common stock in exchange for each outstanding share of Ruckus common stock. The results of operations for the acquired business are included in the Company’s Consolidated Statements of Income from the Acquisition Date. Immediately prior to the completion of the acquisition, there were 92.2 million outstanding shares of Ruckus common stock, which included 3.2 million shares of Ruckus common stock owned by a dissenting former Ruckus stockholder who has filed a petition in Delaware Court of Chancery seeking appraisal of the fair value of those shares under Delaware law. As a result, no cash payment had been made and no shares had been issued to the dissenting stockholder as of October 29, 2016.

Based on the $8.60 per share closing price of the Company’s common stock on the Acquisition Date, the total purchase consideration paid or payable was $1.3 billion, consisting of approximately $574.0 million in cash for total outstanding Ruckus shares less dissenting shares, $574.0 million of equity interests in the Company, $78.3 million in cash for outstanding vested Ruckus stock options allocated to purchase consideration, $7.4 million of the fair value of replacement awards allocated to the purchase consideration, and $41.3 million relating to the appraisal petition filed by the dissenting former Ruckus stockholder, which was accrued as of October 29, 2016, and reported within “Other accrued liabilities” on the Company’s Consolidated Balance Sheets.

For the fiscal year ended October 29, 2016, the Company recorded direct acquisition costs of $15.7 million and integration costs of $12.3 million. These costs were expensed as incurred and are presented in the Company’s Consolidated Statements of Income for the fiscal year ended October 29, 2016, as “Acquisition and integration costs.”

In connection with the acquisition of Ruckus, the Company allocated the total purchase consideration to the net assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the Acquisition Date. The following table summarizes the preliminary allocation of the total purchase consideration to the fair value of the assets acquired and liabilities assumed (in thousands):



Assets acquired:
Cash and cash equivalents	$	95,515
Short-term investments	150,257
Accounts receivable, net of allowances for doubtful accounts of $2,100	41,339
Inventories	63,035
Prepaid expenses and other current assets	5,201
Property and equipment, net	21,777
Identifiable intangible assets	417,000
Other assets	1,697
Total assets acquired	795,821
Liabilities assumed:
Accounts payable	16,375
Accrued employee compensation	17,514
Deferred revenue	13,923
Other accrued liabilities	33,809
Non-current deferred revenue	9,364
Non-current deferred tax liabilities	62,963
Other non-current liabilities	40,561
Total liabilities assumed	194,509
Net assets acquired, excluding goodwill (a)	601,312
Total purchase consideration (b)	1,275,060
Estimated goodwill (b) - (a)	$	673,748

Goodwill represents the excess of the total purchase consideration over the fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to planned growth in new markets and synergies expected to be achieved from the combined operations of the Company and Ruckus. Goodwill of $279.7 million was assigned to the IP Networking Products reporting unit, and goodwill of $394.0 million was assigned to the Global Services reporting unit. Goodwill recognized in the acquisition is not deductible for tax purposes.

A preliminary assessment of the fair value of identified intangible assets and their respective useful lives are as follows (in thousands, except for estimated useful life):



	Approximate Fair Value		Estimated Useful Life (In years)
Trade name/trademark	$	44,000	11.00
Customer relationships	120,000		1 - 7
Developed technology	226,000		6 - 7
IPR&D ⁽¹⁾	27,000		N/A
Total intangible assets	$	417,000


⁽¹⁾	IPR&D will be accounted for as an indefinite-lived intangible asset until the underlying projects are completed or abandoned.

The total preliminary purchase allocation reflects the Company’s preliminary estimates and is subject to revision as additional information in relation to the fair value of the inventories, identifiable intangible assets, and deferred revenue assumed becomes available. During the fourth quarter of fiscal year 2016, the Company obtained additional information related to the fair value of inventories, identifiable intangible assets, and deferred tax liabilities. As a result, the Company recorded a measurement period adjustment resulting in a net decrease in goodwill of $29.0 million. The impact on the line items “Cost of revenues” and “Acquisition and integration costs” on the Company’s Consolidated Statements of Income was immaterial for the fiscal year 2016. The Company is continuing to assess the values assigned to the remaining assets acquired and liabilities assumed. Additional information that existed as of the Acquisition Date may become known to the Company during the remainder of the measurement period. This period is not to exceed 12 months from the acquisition date.

Pursuant to the terms of the Agreement and Plan of Merger, all unvested Ruckus awards, then comprised of restricted stock units (“RSUs”), performance-based RSUs, and stock options, were cancelled and replaced with Company RSUs and stock options (“replacement awards”). Per ASC 805, Business Combinations, the replacement of stock options or other share-based payment awards in conjunction with a business combination represents a modification of share-based payment awards that must be accounted for in accordance with ASC 718, Compensation—Stock Compensation. As a result of the Company’s obligation to issue replacement awards, a portion of the fair-value-based measure of replacement awards is included in measuring the purchase consideration transferred in the business combination. To determine the portion of the replacement awards that is part of the purchase consideration, the Company measured the fair value of both the replacement awards and the historical Ruckus awards as of the Acquisition Date, in accordance with ASC 718. The fair value of the replacement awards, whether vested or unvested, was included in the purchase consideration to the extent that pre-acquisition services had been rendered. The purchase consideration also included the fair value of accelerated vesting for awards that vested at the Acquisition Date due to change-in-control provisions.

In addition, the Company accelerated 20% to 50% of the vesting of unvested replacement awards granted to nine Ruckus executives and modified the vesting schedules of unvested replacement awards granted to those nine plus an additional four Ruckus executives. As a result, the Company recorded $6.1 million as an expense in the fiscal year ended October 29, 2016.

As of October 29, 2016, the fair value of the remaining unvested replacement awards of $21.8 million will be recorded as stock-based compensation expense over the applicable future vesting periods.

For the fiscal year ended October 29, 2016, the Company’s Consolidated Statements of Income included revenue of $181.5 million related to Ruckus. However, the Company cannot determine earnings specifically related to Ruckus since the date of acquisition, as we began integrating these operations into our business upon closing of the acquisition.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the consolidated results of the Company and Ruckus for the fiscal year ended October 29, 2016, giving effect to the acquisition and the related debt financing as if they had occurred on November 2, 2014, and combines the historical financial results of the Company and Ruckus. The unaudited pro forma financial information includes adjustments to give effect to pro forma events that are directly attributable to the acquisition and the related debt financing. The pro forma financial information includes adjustments to amortization and depreciation for intangible assets and property, plant, and equipment acquired, adjustments to stock-based compensation expense, the effect of acquisition on inventory acquired and deferred revenue, interest expense for the additional indebtedness, and acquisition and integration costs. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods. The unaudited pro forma financial information does not give effect to the potential impact of current financial conditions, regulatory matters, or any anticipated synergies, operating efficiencies, or cost savings that may be associated with the acquisition. Consequently, actual results will differ from the unaudited pro forma financial information presented below (in thousands, except for per share amounts):



	Fiscal Year Ended
	October 29, 2016		October 31, 2015
Unaudited pro forma consolidated results:
Pro forma revenues	$	2,556,240	$	2,633,746
Pro forma net income	$	187,167	$	227,566
Pro forma net income per share—basic	$	0.46	$	0.54
Pro forma net income per share—diluted	$	0.45	$	0.53

Unaudited pro forma net income for the fiscal year ended October 31, 2015, includes nonrecurring pro forma adjustments directly attributable to the acquisition to the effect of inventory acquired of $35.9 million and acquisition and integration costs of $28.0 million. No such adjustments are included in any other periods.

Other Fiscal Year 2016 Acquisition

In March 2016, the Company completed its acquisition of a privately held developer of software for data center automation to strengthen its IP Networking product portfolio. The Company does not consider this acquisition to be material to its results of operations or financial position. Therefore, the Company is not presenting pro forma financial information of combined operations.

Prior Fiscal Year Acquisitions

In March 2015, the Company completed its acquisition of two businesses to strengthen its software networking portfolio. The total aggregate purchase price of the acquisitions was $96.1 million. The total net aggregate purchase price of the acquisitions, net of $0.1 million of cash acquired as part of the acquisitions, was $95.5 million in cash consideration and $0.5 million in non-cash consideration.

For the fiscal year ended October 29, 2016, the Company recorded no direct acquisition costs and integration costs related to the prior fiscal year acquisitions. For the fiscal year ended October 31, 2015, the Company recorded direct acquisition costs and integration costs of $1.4 million and $2.5 million, respectively. These costs were expensed as incurred and are presented in the Company’s Consolidated Statements of Income for the fiscal year ended October 29, 2016, and October 31, 2015, as “Acquisition and integration costs.”

For each acquisition, the Company allocated the total purchase consideration to the net assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition dates. The Company also granted RSU awards and cash awards to transferring or continuing employees of the acquired businesses. These awards require the employees to continue providing services to the Company for the duration of the vesting or payout periods.

The RSUs were accounted for as stock-based compensation expense and are reported, as applicable, within “Cost of revenues,” “Research and development,” “Sales and marketing,” and “General and administrative” on the Company’s Consolidated Statements of Income. For the fiscal year ended October 29, 2016, and October 31, 2015, the Company recognized $2.5 million and $1.6 million, respectively, of stock-based compensation expense related to these RSU awards.

The cash awards were accounted for as employee compensation expense and are reported within “Research and development” on the Company’s Consolidated Statements of Income. For the fiscal year ended October 29, 2016, and October 31, 2015, the Company recognized $4.2 million and $4.8 million, respectively, of cash compensation expense related to these awards.

On September 11, 2014, the Company completed its acquisition of the assets of Vistapointe, Inc. (“Vistapointe”), a privately held developer of network visibility and analytics solutions with facilities located in San Ramon, California and Bangalore, India, and certain assets of its related entities. This acquisition has enhanced Brocade’s leadership role in developing software-based, carrier-grade network visibility and analytics (“NVA”) solutions for mobile network operators. This acquisition has also enhanced Brocade’s network functions virtualization (“NFV”) technology and gives Brocade new products to address with visibility and analytics solutions for mobile operators.

The total purchase price was $16.9 million, consisting entirely of cash consideration. In addition, the Company paid direct acquisition costs of $0.4 million.

Divestitures

On January 17, 2014, the Company completed the sale of its network adapter business to QLogic Corporation (subsequently acquired by Cavium, Inc.) as part of the Company’s business strategy to focus on its portfolio of high-performance networking hardware and software-based products and services.

The net carrying amount of the network adapter business’ assets and liabilities at the time of the divestiture was $5.1 million, comprised primarily of associated goodwill of $4.1 million. The sale resulted in a gain of $4.9 million, which is presented in the Company’s Consolidated Statements of Income for fiscal year ended November 1, 2014, as “Gain on sale of network adapter business.”