Acquisitions

In August 2012, we completed our acquisition of Instagram, Inc. (Instagram), a privately-held company which has built a mobile phone-based photo-sharing service that is expected to enhance our photos product offerings and to enable users to increase their levels of mobile engagement and photo sharing. We have accounted for this transaction as a business acquisition for a total purchase price of $521 million, consisting of the issuance of approximately 12 million vested shares of our Class B common stock to non-employee stockholders of Instagram and $300 million in cash. The value of the equity component of the purchase price was determined for accounting purposes based on the fair value of our common stock on the closing date. We also issued approximately 11 million unvested shares of our Class B common stock to employee stockholders of Instagram on the closing date, with an aggregate fair value of $194 million, which will be recognized as they vest over a three-year service period as share-based compensation expense.

During the nine months ended September 30, 2012, we also completed other business acquisitions for total consideration of $87 million. These acquisitions were not material to our condensed consolidated financial statements individually or in the aggregate. Pro forma results of operations related to our acquisition of Instagram or of other companies during the nine months ended September 30, 2012 have not been presented because they are not material to our condensed consolidated statements of operations, either individually or in the aggregate.

The fair value of assets acquired and liabilities assumed for all acquisitions completed during the nine months ended September 30, 2012 was based upon a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. The primary areas of the purchase price that are not yet finalized are related to income taxes and residual goodwill. Measurement period adjustments that we determine to be material will be applied retrospectively to the period of acquisition in our condensed consolidated financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could also be affected.

The following table summarizes the allocation of estimated fair values of the assets acquired and liabilities assumed, including those items that are still preliminary allocations, and related useful lives, where applicable:



	Instagram, Inc.				Other
	(in millions)			Useful lives (in years)	(in millions)			Useful lives (in years)
Amortizable intangible assets:
Acquired technology	$	74		5	$	19		3 - 5
Tradename and other	63			2 - 7	8			2 - 3
Net liabilities assumed	(1		)		(4		)
Deferred tax liabilities	(50		)		(9		)
Net assets acquired	$	86			$	14
Goodwill	$	435			$	73
Total fair value considerations	$	521			$	87

Goodwill generated from all business acquisitions completed during the nine months ended September 30, 2012 is primarily attributable to expected synergies from future growth and potential monetization opportunities and is not deductible for tax purposes.

During the nine months ended September 30, 2012, we also acquired $633 million of patents and other intellectual property rights. We completed the largest of these intangible asset purchases in June 2012 under an agreement with Microsoft Corporation pursuant to which we were assigned Microsoft’s rights to acquire approximately 615 U.S. patents and patent applications and certain of their foreign counterparts, consisting of approximately 170 foreign patents and patent applications, that were subject to an agreement between AOL Inc. and Microsoft entered into on April 5, 2012. We paid $550 million in cash in exchange for these patents and patent applications. As part of this transaction, we established a deferred tax liability of $49 million to reflect the difference between the future tax basis and book basis in the acquired patents and patent applications, which also increased the capitalized patent cost by this amount. As part of this transaction, we obtained a license to the other AOL patents and patent applications being purchased by Microsoft and granted Microsoft a license to the AOL patents and patent applications that we acquired. The acquisitions of these patents, patent applications and other intellectual property rights were accounted for as asset acquisitions. Patents acquired during the nine months ended September 30, 2012 have estimated useful lives ranging from three to 17 years from the dates of acquisition.