3. Merger with Capella Education Company

On August 1, 2018, the Company completed its merger with CEC and its wholly owned subsidiaries, pursuant to a merger agreement dated October 29, 2017. The merger is expected to enable the Company to be a national leader in education innovation that improves affordability and enhances career outcomes by offering complementary programs and sharing academic and technological best practices, through a best-in-class corporate platform supporting two independent universities.

Pursuant to the merger agreement, the Company issued 0.875 shares of the Company’s common stock for each issued and outstanding share of CEC common stock. Outstanding equity awards held by existing CEC employees and certain non-employee directors of CEC were assumed by the Company and converted into comparable Company awards at the exchange ratio. Outstanding equity awards held by CEC non-employee directors who did not serve as directors of the Company after completion of the merger were converted to Company awards and settled. Outstanding equity awards held by former CEC employees were settled upon completion of the merger in exchange for cash payments as specified in the merger agreement.

The following table summarizes the components of the aggregate consideration transferred for the acquisition of CEC (in thousands):


Fair value of Company common stock issued in exchange for CEC outstanding shares(1)	$	1,209,483
Fair value of Company equity-based awards issued in exchange for CEC equity-based awards		27,478
Total fair value of consideration transferred	$	1,236,961

⁽¹⁾

The Company issued 10,263,775 common shares at a market price of $117.84 in exchange for each issued and outstanding share of CEC common stock.

The Company applied the acquisition method of accounting to CEC’s business, whereby the excess of the acquisition date fair value of consideration transferred over the fair value of identifiable net assets was allocated to goodwill. Goodwill reflects workforce and synergies expected from cost savings, operations, and revenue enhancements of the combined company that are expected to result from the acquisition. The goodwill recorded as part of the merger has been provisionally allocated to the Strayer and Capella reportable segments in the amount of $330.6 million and $393.3 million, respectively, and is not deductible for tax purposes.

The Company incurred $18.7 million of acquisition-related costs which were recognized in Merger costs in the unaudited condensed consolidated statements of income. Issuance costs of $0.1 million were recognized in additional paid-in capital in the unaudited condensed consolidated balance sheets.

The preliminary opening balance sheet is subject to adjustment based on final assessment of the fair values of certain acquired assets and liabilities, primarily intangible assets and income taxes. As the Company finalizes its assessment of the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments occur.

The preliminary fair value of assets acquired and liabilities assumed as well as a reconciliation to consideration transferred is presented in the table below (in thousands):


Cash and cash equivalents	$	168,387
Marketable securities, current		31,419
Tuition receivable		39,141
Income tax receivable		163
Other current assets		8,496
Marketable securities, non-current		34,700
Property and equipment, net		53,182
Other assets		15,906
Intangible assets		349,800
Goodwill		723,929
Total assets acquired		1,425,123
Accounts payable and accrued expenses		(46,735)
Contract liabilities		(39,000)
Deferred income taxes		(100,190)
Other long term liabilities		(2,237)
Total liabilities assumed		(188,162)
Total consideration	$	1,236,961

The table below presents a summary of intangible assets acquired (in thousands) and the weighted average useful lives of these assets:


			Weighted Average
		Fair Value	Useful Life in Years
Trade names	$	183,800	Indefinite
Student relationships		166,000	3
	$	349,800

The Company determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the assets and liabilities. The Company utilized the following assumptions, some of which include significant unobservable inputs which would qualify the valuations as Level 3 measurements, and valuation methodologies to determine fair value:

Intangible assets - To determine the fair value of the trade name, the Company used the relief from royalty approach. The excess earnings method was used to estimate the fair value of student relationships.

Property and equipment - Included in property and equipment is course content of $14.0 million, valued using the relief from royalty approach, and internally developed software of $5.0 million, valued using the cost approach. Each will be amortized over three years. All other property and equipment was valued at estimated cost.

Contract liabilities - The Company estimated the fair value of contract liabilities using the cost build-up method, which represents the cost to deliver the services plus a normal profit margin.

Limited partnership investments - The fair value of investments in limited partnerships was estimated based on the Company’s ownership interest in the partnership, and the estimated fair value of the partnership as a whole as of the most recent reporting period.

Other current and noncurrent assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.

The operations of CEC were included in the consolidated financial statements as of the acquisition date. The revenue and net loss for CEC reported within the consolidated financial statements for the three and nine months ended September 30, 2018 were $46.1 million and $43.1 million, respectively.

Pro Forma Financial information

The following unaudited pro forma information has been presented as if the CEC acquisition occurred on January 1, 2017. The information is based on the historical results of operations of the acquired business, adjusted for:

The allocation of purchase price and related adjustments, including the adjustments to amortization expense related to the fair value of intangible assets acquired.

The exclusion of acquisition-related costs incurred during the nine months ended September 30, 2017 and 2018.

Associated tax-related impacts of adjustments.

Changes to align accounting policies.

The pro forma results do not necessarily represent what would have occurred if the acquisition had actually taken place on January 1, 2017, nor do they represent the results that may occur in the future. The pro forma adjustments are based on available information and upon assumptions the Company believes are reasonable to reflect the impact of this acquisition on the Company’s historical financial information on a supplemental pro forma basis (in thousands).


	Pro Forma Combined
	Nine Months Ended		Nine Months Ended
	September 30, 2017		September 30, 2018
Revenue	$	664,523	$	679,309
Net Income		32,096		10,606