Acquisition of the Global Commodities Group

9 Months Ended

Aug. 31, 2011

Acquisition of the Global Commodities Group [Abstract]

Acquisition of the Global Commodities Group

Note 3. Acquisition of the Global Commodities Group

On July 1, 2011, we acquired Prudential Bache’s Global Commodities Group from Prudential. Total cash payments made as consideration for the acquisition were $422.0 million (a cash payment of $419.5 million was made on July 1, 2011 and an additional payment of $2.5 million is anticipated). The acquisition included 100% of the equity interests in Prudential Bache Commodities LLC, a US-based full-service futures commission merchant; Prudential Bache Securities LLC, a US-based registered broker dealer; Bache Commodities Limited, a UK-based global commodities and financial derivatives broker; Prudential Bache Asset Management, Inc., a US-based registered investment advisor and commodity trading advisor, Prudential Bache Financial Services, Inc., a global over-the-counter commodities dealer; and Bache Commodities (Hong Kong) Ltd., a Hong Kong-based licensed futures dealer. In addition, we acquired related information technology assets and related contracts used by the Global Commodities Group.

The Global Commodities Group provides sales, trading, clearing and execution services covering a wide variety of commodity, financial and foreign exchange futures, swaps and forward contracts to an institutional client base. The acquisition of the Global Commodities Group will allow us to offer clients globally an increased range of products, including exchange-traded futures and over-the-counter trading in energy, metals and agricultural markets.

In connection with the acquisition of the Global Commodities Group on July 1, 2011, certain acquired entities entered into a $1.0 billion credit facility agreement with Prudential that was terminated by us on September 16, 2011. For further details, see Note 11, Short-Term Borrowings. On August 26, 2011, Jefferies Bache Financial Services, Inc., Jefferies Bache, LLC and Jefferies Bache Limited, as borrowers, entered into a senior secured revolving credit facility in aggregate totaling $950.0 million with a group of commercial banks. See Note 12, Long-Term Borrowings for further information.

We accounted for the acquisition under the purchase method of accounting. Accordingly, the assets acquired, including identifiable intangible assets, and liabilities assumed were recorded at their respective fair values as of the date of acquisition.

The fair values of the net assets acquired, including identifiable intangible assets, was approximately $474.5 million, which exceeded the purchase price of $422.0 million, resulting in a bargain purchase gain of approximately $52.5 million. The bargain purchase gain is included within Other income in the Consolidated Statements of Earnings, is not taxable and is presented within the Capital Market Business Segment. The business of the Global Commodities Group are included within the Capital Market Business Segment.

We believe we were able to acquire the Global Commodities Group for less than the fair value of its assets as the business activities of the Global Commodities Group were not a core business for Prudential and therefore Prudential was willing to exit the commodities trading business at such a price.

Approximately $18.3 million was recognized as the fair value of intangible assets. Of this amount, $5.8 million represents the fair value of customer relationships, $11.2 million represents the fair value of exchange and clearing organization membership interests and registrations and $1.3 million represents the fair value of the Bache trade name. See Note 10, Goodwill and Other Intangible Assets for further details. Additionally, we recognized in the acquisition approximately $6.3 million of internally developed software that is recorded within Premises and equipment on the Consolidated Statements of Financial Condition.

Condensed statement of net assets acquired

The following reflects the fair value of assets acquired and liabilities assumed, by major class, on July 1, 2011 (in thousands):

Assets acquired:
Cash and cash equivalents	$	101,343
Cash and securities segregated		3,130,586
Financial instruments owned, at fair value		918,598
Securities purchased under agreements to resell		1,489
Receivables:
Brokers, dealers and clearing organizations		313,939
Customers		173,477
Fees, interest and other		122
Premises and equipment		13,584
Indefinite-lived intangible exchange memberships and licences (1)		11,219
Finite-lived intangible customer relationships (1)(2)		5,800
Trade names (1)(3)		1,300
Other assets		32,076
Total assets	$	4,703,533
Liabilities assumed:
Short-term borrowings	$	301,027
Financial instruments sold, not yet purchased, at fair value		267,200
Payables:
Brokers, dealers and clearing organizations		43,588
Customers		3,384,263
Accrued expenses and other liabilities		232,933
Total liabilities	$	4,229,011
Fair value of net assets acquired	$	474,522
Purchase price:
Cash	$	422,013
Total purchase price	$	422,013
Bargain purchase gain	$	52,509

(1)	Intangible assets are recorded within Other assets on the Consolidated Statements of Financial Condition.
(2)	The fair value of the finite-lived customer relationships will be amortized on a straight line basis over a weighted-average useful life of approximately 9.6 years.
(3)	The fair value of the Bache trade name will be amortized on a straight line basis over a useful life of 1.5 years.

Unaudited pro forma condensed combined financial information

Our third quarter results of operation include the operations of the acquired entities for the period from July 1, 2011 to August 31, 2011. The Consolidated Statement of Earnings for the three months ended August 31, 2011, include $43.5 million of Net revenues and $6.4 million of Net earnings contributed by the Global Commodities Group.

Set forth below are unaudited pro forma combined financial information as they may have appeared if the acquisition had been completed on January 1, 2010 taking into account certain adjustments described below, including the exclusion of the bargain purchase gain of $52.5 million related to the acquisition. The unaudited pro forma combined financial information includes the Global Commodities Group’s actual results from January 1, 2010 to August 31, 2010 and December 1, 2010 to August 31, 2011.

	Three months ended				Nine months ended		Eight months ended
(in millions, except per share data)	August 31, 2011		August 31, 2010		August 31, 2011		August 31, 2010
Total net revenues	$	473.3	$	566.7	$	2,079.7	$	1,703.0
Net earnings to common shareholders	$	16.7	$	37.6	$	198.4	$	210.8
Earnings per common share:
Basic	$	0.07	$	0.18	$	0.90	$	1.03
Diluted	$	0.07	$	0.18	$	0.90	$	1.03
Weighted average common shares:
Basic		218,426		195,601		209,544		196,943
Diluted (1)		218,431		195,612		213,661		201,062

(1) The conversion of our mandatorily redeemable convertible preferred stock was considered anti-dilutive for the purposes of the pro forma calculation for the three months ended August 31, 2011.

The unaudited pro forma combined financial information is presented for illustrative purposes only and does not purport to be indicative of the financial results we would have achieved had the acquisition been completed as of January 1, 2010, nor is it indicative of the results of operations in future periods.

The pro forma information was derived from historical financial information for 2011 and 2010 adjusted to give effect for events directly attributable to the acquisition and factually supportable and expected to have a continuing impact on the combined results. The adjustments include:

a)	the bargain purchase gain of $52.5 million has been excluded from Net revenues and Net earnings for the periods ended August 31, 2011 and included in Net revenues and Net earnings for the eight months ended August 31, 2010;
b)	an adjustment to reflect Global Commodities Group’s physical commodities at market value;
c)	acquisition costs totaling $4.4 million recognized in Professional services has been excluded from the periods ended August 31, 2011 and included in the eight months ended August 31, 2010;
d)	additional amortization expense on the acquired intangible assets and internally developed software of $0.2 million and $1.6 million for the three month and nine month periods ended August 31, 2011 and $.07 million and $1.9 million for the three and eight month periods ended August 31, 2010;
e)	the recording of income tax expense resulting from the pro forma adjustments before tax at an effective rate of 44.9% and 36.5% for the three month and nine month periods ended August 31, 2011 and 45.4% and 33.8% for the three and eight month periods ended August 31, 2010.