Acquisition of Ignis ASA

6 Months Ended

Oct. 30, 2011

Business Combinations [Abstract]

Acquisition of Ignis ASA [Text Block]

Acquisition of Ignis ASA

On March 22, 2011, the Company entered into a transaction agreement with Ignis ASA ("Ignis"), a Norwegian company whose securities were traded on the Oslo Stock Exchange, under which, on April 7, 2011, the Company made a recommended voluntary public cash tender offer to acquire all of the outstanding Ignis shares not then owned by the Company for NOK 8 per share. On May 18, 2011, the Company completed this tender offer and purchased an additional 38.1 million shares of Ignis (in addition to 25.7 million shares of Ignis that the Company owned prior to the offer) for an aggregate purchase price of $54.7 million, resulting in the Company owning approximately 81% of all outstanding Ignis shares.

Under the Norwegian Securities Trading Act, the Company's ownership of more than one-third of the voting shares of Ignis triggered the requirement for the Company to make a mandatory unconditional offer for all remaining outstanding Ignis shares. On May 24, 2011, the Company launched the mandatory offer at a cash offer price of NOK 8 per share. During the offer period, which ended on June 22, 2011, approximately 12.8 million additional shares of Ignis were tendered, further increasing the Company's ownership position to approximately 97% of all outstanding Ignis shares. As the owner of more than 90% of all outstanding Ignis shares, the Company then exercised its right to effect a compulsory acquisition of the balance of all outstanding Ignis shares for a cash price of NOK 8 per share. As of June 29, 2011, the Company owned 100% of all outstanding Ignis shares, and the shares were de-listed from the Oslo Stock Exchange.

Ignis is an innovative provider of optical components and network solutions for fiber optic communications. It operates globally through four subsidiaries: Fi-ra Photonics ("Fi-ra") in Korea (71.8% owned by Ignis) and wholly-owned subsidiaries Syntune in Sweden, Ignis Photonyx in Denmark, and SmartOptics in Norway. Ignis' product and services portfolio comprises passive optical components including optical chips, splitters and multiplexers, active optical components such as tunable lasers and modulators, and WDM-based solutions enabling the building of simple and cost effective high-capacity optical networks. The Company's management and board of directors believe that this acquisition will: a) provide the Company a secure supply of Ignis' tunable laser products which the Company believes have the highest performance of any such devices currently available in the market; b) further the Company's vertical integration strategy by providing an internal source of these devices, which the Company currently purchases on the merchant market; c) enable the Company to offer its customers a number of new 40 and 100 Gbps products based on the advanced optical device integration technologies of Ignis' various business units; and d) allow the Company to expand its product portfolio to include a number of other products incorporating innovative technologies and focus on attractive growth markets.

Ignis and its subsidiaries maintain their financial records on the basis of a fiscal year ending on December 31, with fiscal quarters ending on March 31, June 30 and September 30, which will change to the Company's basis of a fiscal year ending on April 30, with fiscal quarters ending on Sunday closest to the end of the three-month period, when financial records of Ignis and its subsidiaries are integrated with the Company's consolidated financial reporting system. The results of Ignis' operations have been included in the consolidated financial statements since May 18, 2011, the date the Company obtained control of Ignis, through September 30, 2011. There were no intervening events in the operating results of Ignis for the month ended October 30, 2011 that materially affected the Company's consolidated financial position or results of operations.

Prior to May 18, 2011, the Company accounted for its 32% interest in Ignis as an equity-method investment. The acquisition-date fair value of this equity interest was $36.6 million (based on the trading price of Ignis shares as quoted on the Oslo Stock Exchange), and is included in the measurement of the consideration transferred. The Company recognized a gain of $5.4 million as a result of remeasuring the equity interest in Ignis that it held before the acquisition date. This gain is included in other income (expense), net in the condensed consolidated statement of operations.

The provisional fair value of the consideration transferred in exchange for the Ignis shares is as follows (in thousands):

Cash	$	98,900
Contingent consideration	13,598
Total	$	112,498

The contingent consideration arrangement requires the Company to pay up to approximately $14.3 million of additional consideration to the former shareholders of one of Ignis' subsidiaries if during calendar years 2011 and 2012 the subsidiary achieves specified levels of revenues, revenue growth, EBITDA and cash flow and successfully launches a new product. The fair value of the contingent consideration arrangement at the acquisition date was $13.6 million. The Company estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The key assumptions in applying the income approach are as follows: 5.5% discount rate and 100% probability of achieving specified milestones.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands):

Cash and cash equivalents	$	5,543
Accounts receivable	11,267
Inventory	14,721
Other current assets	2,161
Property, equipment and improvements	6,515
Intangible assets	34,860
Other assets	1,457
Total identifiable assets acquired	76,524
Current liabilities	(17,439		)
Short-term debt	(9,985		)
Long-term debt	(7,526		)
Deferred tax liabilities	(3,553		)
Other long-term liabilities	(330		)
Total liabilities assumed	(38,833		)
Net identifiable assets acquired	37,691
Non-controlling interest	(8,300		)
Goodwill	83,107
Net assets acquired	$	112,498

The Company is in the process of obtaining third-party valuations of certain intangible assets; thus, the provisional measurements of intangible assets, goodwill and deferred income tax liabilities are subject to change.

Of the $34.9 million of acquired intangible assets, $250,000 was provisionally assigned to in-process research and development assets that were recognized at fair value on the acquisition date. The remaining $34.6 million of acquired intangible assets are subject to a weighted-average useful life of approximately 9 years. Those definite-lived intangible assets include developed technology of $16.3 million (7-year weighted-average useful life), customer relationships of $16.3 million (12-year weighted-average useful life), internal use software of $880,000 (7-year useful life), trade name of $800,000 (15-year useful life), and order backlog of $350,000 (1-year useful life). As noted above, the fair value of the acquired identifiable intangible assets is provisional pending receipt of the final valuations for these assets.

As noted above, one of Ignis' subsidiaries (Fi-ra) is 71.8% owned by Ignis. The acquisition-date fair value of the 28.2% non-controlling interest in Fi-ra is estimated to be $8.3 million, based on the estimated fair value of Fi-ra's equity.

The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Ignis. None of the goodwill is expected to be deductible for income tax purposes.

The acquisition-date fair value of accounts receivable acquired is $11.3 million, with the gross contractual amount being $11.6 million. The Company expects $300,000 to be uncollectible.

The Company recognized $1.1 million of acquisition related costs that were expensed in the six months ended October 30, 2011. These costs are included in general and administrative operating expenses in the consolidated statement of operations.

Unaudited pro forma and other supplemental financial statement disclosures otherwise required by ASC 850 for material business combinations have not been presented herein because management does not believe the acquisition of Ignis is significant to the consolidated financial position or operating results of Finisar.