Business Combinations, Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2011

Business Combinations, Goodwill and Intangible Assets [Abstract]

Business Combinations, Goodwill and Intangible Assets

4. Business Combinations, Goodwill and Intangible Assets

Business Combinations

On September 14, 2011, the Company completed, through one of its subsidiaries, Meli Participaciones S.L. (“ETVE” or “the Buyer”), the acquisition of the 60% of outstanding membership interest of Autopark LLC, a limited liability company organized under the laws of Delaware, from Hasteny Trading S.A. (“Hasteny“or “the Seller”), a parent company organized under the laws of Uruguay, who owned all the shares of the capital stock of Autopark LLC.

Autopark LLC owns directly and indirectly the 100% of the membership interest of AP Clasificados S.R.L. de C.V. (“AP Clasificados”), a company organized under the laws of Mexico. AP Clasificados operates an online classified advertisements platform in Mexico primarily dedicated to the sale of automobiles at www.autoplaza.com.mx and real estate at www.homeshop.com.mx (“the Acquired Business”).

The aggregate purchase price paid by the Company to the Seller for the 60% of the Acquired Business was $5,472,056. In addition, the Company incurred in certain direct costs of the business combination which were expensed as incurred.

On September 12, 2011 (the “settlement date”), part of the purchase price amounting to $1,500,000, was placed into an escrow account, in order to cover unexpected liabilities and working capital. On September 12, 2012 and 2013, 50% of the escrow amount less the amount of all claims made by the Buyer, if any, will be released, respectively.

In addition, ETVE has the right and option (but not the obligation) to purchase the remaining 40% of the membership interest of Autopark LLC following the earlier to occur of (i) third anniversary of the settlement date, or (ii) additional capital contribution be required to capitalize Autopark LLC by their own member’s decision and Hasteny does not make such additional capital contribution within ten (10) days of such members’ consent. The total consideration to be paid shall be the greater of (i) $4,000,000 and (ii) the amount resulting from multiplying (A) the percentage of the membership interest held by Hasteny as of the date of the Call Notice by (B) an amount equal to 3.5 times the amount of invoiced sales of the Acquired Business for the twelve months period ending on the date of Call Notice.

On the other hand, Hasteny has the right and option (but not the obligation) to sell and transfer, all of the Hasteny interest in Autopark LLC, to ETVE and ETVE has the obligation to buy following the earlier to occur (i) the third anniversary of the effective date, (ii) the termination of the employment of the main operating officer of the acquired company, or (iii) death or incapacitation of the main operating officer of the acquired company. The total consideration to be paid by ETVE for the Hasteny Interests shall be the same as described in the preceding paragraph.

The Seller and its affiliates have also agreed to enter into certain non-compete agreements with the Company for 5 years since September 12, 2011.

The Company’s statement of income includes the results of operations of the Acquired Businesses from September 15, 2011.

The following table summarizes the preliminary allocation of the cash paid in the acquisition:

Net Tangible Assets	$	153,349
Identifiable Intangible Assets		3,290,998
Deferred Tax Liabilities		(987,299	)
Goodwill		6,663,045
Noncontrolling interest		(3,648,037	)
Aggregate Purchase Price	$	5,472,056

Assets acquired were valued at their respective fair values at the acquisition date according to U.S. GAAP. The valuation of identifiable intangible assets acquired as well as non-controlling interest reflects management’s estimates based on, among other factors, use of established valuation methods. The identifiable intangible assets consist of trademarks and domains, customer lists and non-compete agreements. Management of the Company estimates that trademarks have an indefinite useful life, for that reason, these intangible assets are not amortized but they are subject to an annual impairment test. Intangible assets associated with customer list and non-compete agreements are amortized over a five year period.

The Company recognized a goodwill because the acquired business is expected to expand the company’s business in Mexico and to strengthen the Company`s leadership position in that country.

Goodwill is not expected to be deductible for tax purposes.

The purchase price allocation, as fully described above, is preliminary.

The results of operations for periods prior to the acquisition, individually and in the aggregate, were not material to the condensed consolidated statements of operations of the Company and, accordingly, pro forma results of operations have not been presented.

Goodwill and Intangible Assets

The composition of goodwill and intangible assets is as follows:

	September 30,			December 31,
	2011			2010
Goodwill	$	62,861,760		$	60,496,314
Intangible assets with indefinite lives
- Trademarks		5,106,747			2,460,952
Amortizable intangible assets
- Licenses and others		2,671,058			2,606,402
- Non-compete agreement		1,288,216			1,241,357
- Customer list		1,765,069			1,607,097
Total intangible assets	$	10,831,090		$	7,915,808
Accumulated amortization		(4,120,965	)		(3,774,641	)
Total intangible assets, net	$	6,710,125		$	4,141,167

Goodwill

The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2011 and the year ended December 31, 2010, are as follows:

	Nine Months Ended September 30, 2011
	Brazil			Argentina			Chile			Mexico			Venezuela		Colombia			Other Countries		Total
Balance, beginning of year	$	13,130,649		$	23,364,326		$	7,296,888		$	5,025,623		$	4,846,030	$	5,448,068		$	1,384,730	$	60,496,314
- Purchase of Autoplaza.com		—			—			—			6,663,045			—		—			—		6,663,045
- Effect of exchange rates changes		(1,332,609	)		(1,272,397	)		(751,701	)		(951,712	)		—		(3,186	)		14,006		(4,297,599	)
Balance, end of the period	$	11,798,040		$	22,091,929		$	6,545,187		$	10,736,956		$	4,846,030	$	5,444,882		$	1,398,736	$	62,861,760

	Year Ended December 31, 2010
	Brazil		Argentina			Chile		Mexico		Venezuela		Colombia		Other Countries		Total
Balance, beginning of year	$	12,565,062	$	24,446,463		$	6,734,405	$	4,770,560	$	4,846,030	$	5,100,939	$	1,359,287	$	59,822,746
- Effect of exchange rates changes		565,587		(1,082,137	)		562,483		255,063		—		347,129		25,443		673,568
Balance, end of the year	$	13,130,649	$	23,364,326		$	7,296,888	$	5,025,623	$	4,846,030	$	5,448,068	$	1,384,730	$	60,496,314

Amortizable intangible assets

Amortizable intangible assets are comprised of customer lists and user base, trademarks and trade names, non-compete agreements, acquired software licenses and other acquired intangible assets including developed technologies. Aggregate amortization expense for intangible assets totaled $252,293 and $236,637 for the three-month periods ended September 30, 2011 and 2010, respectively. Aggregate amortization expense for intangible assets totaled $730,815 and $616,984 for the nine-month periods ended September 30, 2011 and 2010, respectively.

Goodwill and Intangible Assets

Expected future intangible asset amortization from acquisitions completed as of September 30, 2011 is as follows:

For year ended 12/31/2011	$	211,694
For year ended 12/31/2012		698,693
For year ended 12/31/2013		430,549
For year ended 12/31/2014		112,035
For year ended 12/31/2015		85,947
Thereafter		64,460
	$	1,603,378