ACQUISITIONS

6 Months Ended

Jun. 30, 2020

Ten-X

On June 24, 2020, pursuant to the Agreement and Plan of Merger, dated May 13, 2020, by and among CoStar Realty Information, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“CRI”), Crescendo Sub, Inc., a Delaware corporation and wholly-owned subsidiary of CRI (“Merger Sub”), Ten-X Holding Company, Inc., a Delaware corporation (“Ten-X”), and Thomas H. Lee Equity Fund VII L.P., a Delaware limited partnership, solely in its capacity as representative thereunder, Merger Sub was merged with and into Ten-X (the “Merger”), with Ten-X surviving the Merger as a wholly-owned subsidiary of CRI. In connection with the Merger, the Company acquired all of the issued and outstanding equity interests in Ten-X for a purchase price of $187 million in cash. Ten-X operates an online auction platform for commercial real estate. This acquisition is expected to enable the Company to create a new end-to-end commercial real estate platform, combining LoopNet and our online audience of buyers with Ten-X’s leadership in online auctions for performing and distressed assets.

The following table summarizes the amounts recorded for acquired assets and assumed liabilities recorded at their fair values as of the acquisition date (in thousands):


	Preliminary: June 24, 2020
Cash and cash equivalents	$	3,290
Accounts receivable	131
Lease right-of-use assets	4,945
Goodwill	135,446
Intangible assets	58,000
Lease liabilities	(4,945)
Deferred tax liabilities	(4,810)
Other assets and liabilities	(4,697)
Fair value of identifiable net assets acquired	$	187,360

The net assets of Ten-X were recorded at their estimated fair values. In valuing the acquired assets and assumed liabilities, fair value estimates were based primarily on future expected cash flows, market rate assumptions for contractual obligations and appropriate discount rates. The purchase price allocation is preliminary, subject to the final determination of net working capital as of the acquisition date, intangibles valuation and the Company's assessment of certain tax matters. The estimated fair value of the customer base assets incorporated significant assumptions that had a material impact on the estimated fair value, such as discount rates, projected revenue growth rates, customer attrition rates and profit margins.

The following table summarizes the fair values (in thousands) of the identifiable intangible assets included in the Company's North America operating segment, their related estimated useful lives (in years) and their respective amortization methods:


	Estimated Fair Value		Estimated Useful Life	Amortization Method
Customer base	$	46,000	6	Accelerated
Technology	11,000		5	Straight-line
Other intangible assets	1,000		2	Straight-line
Total intangible assets	$	58,000

intangible assets that do not qualify for separate recognition, such as the assembled workforce. The $135 million of goodwill recorded as part of the acquisition is associated with the Company's North America operating segment. Goodwill recorded in connection with this acquisition is not amortized, but is subject to an annual impairment test. Goodwill recognized is not deductible for income tax purposes.

As of June 30, 2020, transaction costs associated with the Ten-X acquisition were not material. The Company paid $3 million in incentive compensation to Ten-X employees negotiated as part of the acquisition, the expense was recognized in the post-combination period.

RentPath

On February 11, 2020, RentPath Holdings, Inc. (“RentPath”), certain direct or indirect wholly-owned subsidiaries of RentPath (together with RentPath, the “Sellers”), and, solely for the purposes set forth therein, CSGP Holdings, LLC (“CSGP”), an indirect wholly owned subsidiary of the Company ("Buyer") entered into an asset purchase agreement (the “Asset Purchase Agreement”) dated as of February 12, 2020. Pursuant to the Asset Purchase Agreement, and subject to the terms and conditions set forth therein, CSGP agreed to acquire for $588 million in cash all of the equity interests of RentPath, as reorganized following an internal restructuring of the Sellers (“Reorganized RentPath") pursuant to and under the joint chapter 11 plan of reorganization of the Sellers and certain of their affiliates to be filed in the U.S. Bankruptcy Court for the District of Delaware. Under the terms of the Asset Purchase Agreement, the Company agreed to guarantee the full and timely performance of CSGP’s obligations under the Asset Purchase Agreement. The completion of the transaction is subject to customary conditions, including the expiration or termination of the applicable waiting period under applicable antitrust laws and bankruptcy approvals. On April 29, 2020, the Company and RentPath each received a request for additional information from the U.S. Federal Trade Commission (“FTC”) with respect to the acquisition. The FTC’s additional request extends the waiting period imposed by the Hart-Scott Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) until the parties complete the compliance process and the FTC has had an opportunity to review and engage with the parties on the substance of their submission. Bankruptcy court approval was obtained on June 9, 2020. On July 29, 2020, the Company exercised its option pursuant to the Asset Purchase Agreement to extend the Outside Date under that agreement for an additional three months in exchange for a maximum potential payment of $7.5 million. The Company continues to expect the acquisition to close on or before February 12, 2021. As required by the Asset Purchase Agreement, the Company paid a $59 million break fee into a cash escrow account. In the event the Asset Purchase Agreement is terminated under specified circumstances in which certain antitrust approvals are not obtained, or a governmental order related to antitrust or competition matters prohibits the consummation of the transaction, this amount is not refundable to the Company. As the transaction had not closed as of June 30, 2020, the break fee is recorded as restricted cash within cash, cash equivalents and restricted cash on the Company's condensed consolidated balance sheets.

STR, LLC and STR Global Ltd.

On October 22, 2019, the Company acquired all of the issued and outstanding equity interests of STR for a purchase price of $435 million. STR is a global provider of benchmarking and analytics for the hospitality industry. The combination of STR's and CoStar's offerings is expected to allow for the creation of valuable new and improved tools for industry participants. The Company applied the acquisition method to account for the STR transaction, which requires that assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date.

The following table summarizes the amounts recorded for acquired assets and assumed liabilities recorded at their fair values as of the acquisition date (in thousands):


	Preliminary: October 22, 2019		Measurement Period Adjustments		Updated Preliminary: October 22, 2019
Cash and cash equivalents	$	11,710	$	(90)	$	11,620
Accounts receivable	8,067				8,067
Lease right-of-use assets	7,306				7,306
Goodwill	261,436		432		261,868
Intangible assets	178,000				178,000
Lease liabilities	(7,306)				(7,306)
Deferred revenue	(10,966)				(10,966)
Deferred tax liabilities	(7,980)				(7,980)
Other assets and liabilities	(4,815)				(4,815)
Fair value of identifiable net assets acquired	$	435,452	$	342	$	435,794

The net assets of STR were recorded at their estimated fair values. In valuing the acquired assets and assumed liabilities, fair value estimates were based primarily on future expected cash flows, market rate assumptions for contractual obligations and appropriate discount rates. Measurement period adjustments primarily relate to the determination of working capital as of the acquisition date. The purchase price allocation is preliminary, subject to the completion of the Company's assessment of certain tax matters. The customer base assets incorporated significant assumptions that had a material impact on the estimated fair value, such as discount rates, projected revenue growth rates, customer attrition rates and projected profit margins. The following table summarizes the fair values (in thousands) of the identifiable intangible assets included in each of the Company's operating segments, their related estimated useful lives (in years) and their respective amortization methods:


	North America					International
	Estimated Fair Value		Estimated Useful Life	Estimated Fair Value		Estimated Useful Life	Amortization Method
Customer base	$	97,000	13	$	42,000	10	Accelerated
Trade name	24,000		15				Straight-line
Other intangible assets	10,000		5	5,000		5	Straight-line
Total intangible assets	$	131,000		$	47,000

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the STR acquisition includes but is not limited to: (i) the expected synergies and other benefits that the Company believes will result from combining its operations with STR's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce. Goodwill recorded in connection with this acquisition is not amortized, but is subject to an annual impairment test. Of the $262 million of goodwill recorded as part of the acquisition, $159 million and $103 million are associated with the Company's North America and International operating segments, respectively. The goodwill recognized in the North America operating segment is expected to be deductible for income tax purposes in future periods.

As part of the STR acquisition, the Company incurred $2 million of transaction costs. Additionally, the Company paid $15 million into a cash escrow account for deferred compensation for certain STR employees, to be paid to active employees after a defined one year period following the acquisition or when earlier terminated by the Company without cause or by the employee for good reason. In the event some or all of those employees are not entitled to their retention bonus, the funds will be remitted to the seller. The Company is recognizing compensation expense for the deferred compensation over the one-year post-combination period.

Off Campus Partners, LLC Acquisition

On June 12, 2019, the Company acquired Off Campus Partners, LLC ("OCP"), a provider of student housing marketplace content and technology to U.S. universities for $16 million. The purchase agreement required an initial payment of $14 million, net of cash acquired, at the time of closing, with the remainder of the purchase price payable one year following the acquisition date, subject to offset for indemnification claims or adjustments to the purchase price after final determination of closing net working capital. During the three months ended June 30, 2020, the Company paid the remaining purchase price in full. As part of the acquisition, the Company recorded goodwill and intangibles assets of $8 million and $9 million, respectively. The net assets of OCP were recorded at their estimated fair value. Measurement period adjustments recognized in 2019 were not material.

Pro Forma Financial Information

The unaudited pro forma financial information presented below summarizes the combined results of operations for the Company, STR and Ten-X as though the companies were combined as of January 1, 2018 and January 1, 2019, respectively. The unaudited pro forma financial information for all periods presented includes amortization charges from acquired intangible assets, retention compensation, as referenced above, and the related tax effects, along with certain other accounting effects, but excludes the impacts of any expected operational synergies. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2018 and January 1, 2019, respectively.

The unaudited pro forma financial information for the three and six months ended June 30, 2020 and 2019 combine the historical results of the Company, STR and Ten-X for the periods prior to the acquisition date, and the effects of the pro forma adjustments listed above.

The unaudited pro forma financial information, in the aggregate, was as follows (in thousands, except per share data):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenue	$	406,107	$	375,999	$	810,745	$	725,691
Net income	$	50,373	$	56,730	$	120,240	$	128,270
Net income per share - basic	$	1.34	$	1.56	$	3.25	$	3.53
Net income per share - diluted	$	1.34	$	1.55	$	3.22	$	3.51

Revenue and net income attributable to Ten-X from June 24, 2020 through June 30, 2020 were not material.