3. Acquisition of KCG Holdings, Inc.

As of the Closing Date of the Acquisition, each of KCG’s issued and outstanding shares of Class A common stock, par value $0.01 per share were cancelled and extinguished and converted into the right to receive $20.00 in cash, without interest, less any applicable withholding taxes.

On the Closing Date, and in connection with the financing of the Acquisition, as described in Note 10, “Borrowings”, the Company issued to Aranda Investments Pte. Ltd. (“Aranda”), an affiliate of Temasek Holdings (Private) Limited (“Temasek”), 6,346,155 shares of the Company’s Class A common stock, pursuant to the investment agreement with Aranda (as amended, the “Aranda Investment Agreement”) for an aggregate purchase price of approximately $99.0 million. On August 10, 2017, the Company issued an additional 1,666,666 shares of its Class A common stock for an aggregate purchase price of $26.0 million (collectively, the “Temasek Investment”).

On the Closing Date, and in connection with the financing of the Acquisition, the Company issued to North Island Holdings I, LP (“NIH”) 39,725,979 shares of the Company’s Class A common stock for an aggregate purchase price of approximately $613.5 million. On August 10, 2017 the Company issued an additional 338,124 shares of its Class A common stock for an aggregate purchase price of $5.2 million (collectively, the “NIH Investment”). In connection with the Temasek Investment and NIH Investment, the Company incurred approximately $7.8 million in fees which were recorded as a reduction to additional paid-in capital.

On July 21, 2017, the outstanding 6.875% Senior Secured Notes due 2020 issued by KCG were redeemed at a redemption price equal to 103.438% of the $465.0 million principal amount, plus accrued and unpaid interest. The redemption was pursuant to the indenture, dated as of March 13, 2015 (as amended, restated, supplemented or otherwise modified), by and among KCG, the subsidiary guarantors party thereto and The Bank of New York Mellon, as trustee and collateral agent.

Accounting treatment of the Acquisition

The Acquisition is accounted for as a purchase of KCG by the Company, pursuant to provisions of ASC 805, Business Combinations. Under the acquisition method of accounting, the assets and liabilities of KCG, as of July 20, 2017, were recorded at their respective fair values and added to the carrying value of the Company's existing assets and liabilities. These fair values were determined with the assistance of third party valuation professionals. The reported financial condition, results of operations and cash flows of the Company for the periods following the Acquisition reflect KCG’s and the Company's balances and reflect the impact of purchase accounting adjustments. As the Company is the accounting acquirer, the financial results for the year ended December 31, 2017 comprise the results of the Company for the entire applicable period and the results of KCG from Closing Date through December 31, 2017. All periods prior to 2017 comprise solely the results of the Company.

Certain former KCG management employees were terminated upon the Acquisition, and as a result were paid an aggregate of $6.4 million pursuant to their existing employment contracts. This amount has been recognized as an expense by the Company and is included in Employee compensation and payroll taxes in the consolidated statements of comprehensive income for the year ending December 31, 2017. The Company also expects to make annual incentive compensation payments to former KCG employees who became employees of the Company following the Merger, and accrued related compensation expense of approximately $35.3 million during the year ended December 31, 2017, which is included in Employee compensation and payroll taxes in the consolidated statements of comprehensive income.

Purchase price and goodwill

The aggregate cash purchase price of $1.40 billion was determined as the sum of the fair value, at $20.00 per share, of KCG shares and warrants outstanding to former KCG stockholders at closing and the fair value of KCG employee stock based awards that were outstanding, and which vested at the Closing Date.

The purchase price has been allocated to the assets acquired and liabilities assumed using their estimated fair values at the Closing Date of the Acquisition. Although the Company has substantially completed its analysis to record the allocation of the purchase price to the KCG acquired assets and liabilities, the allocation of the purchase price may be modified over the measurement period, which does not exceed twelve months from the Closing Date, as more information is obtained about the fair values of assets acquired and liabilities assumed. Adjustments to the provisional values during the measurement period will be recorded in the reporting period in which the adjustment amounts are determined. The Company has engaged third party specialists for the purchase price allocation.

During the quarter ended December 31, 2017, the Company recorded adjustments to its initial fair value estimates in the Acquisition. Among the adjustments recorded, the fair value of acquired intangible assets and property, equipment and capitalized software were increased by $18.7 million and $2.2 million, respectively, and other assets, primarily income taxes receivable, decreased by $8.6 million. Cash and securities segregated under federal regulations of $3.0 million was reclassified into cash and equivalents, and payables to customers of $17.6 million were reclassified to accounts payable and accrued expenses and other liabilities. Deferred tax assets were adjusted to account for the effects of the aforementioned adjustments, and goodwill decreased by $14.7 million as a result of these adjustments.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Closing Date:


(in thousands)		September 30, 2017		Measurement Period		December 31, 2017
Cash and equivalents	$	592,993	$	2,676	$	595,669
Cash and securities segregated under federal regulations		3,000		(3,000)		-
Securities borrowed		1,406,444		-		1,406,444
Securities purchased under agreements to resell		16,894		-		16,894
Receivables from broker dealers and clearing organizations		553,031		(211)		552,820
Financial instruments owned, at fair value		2,095,339		-		2,095,339
Property, equipment and capitalized software		112,204		2,163		114,367
Intangibles		156,300		18,695		174,995
Deferred tax assets		22,928		980		23,908
Other assets		331,820		(8,636)		323,184
Total Assets	$	5,290,953	$	12,667	$	5,303,620

Securities loaned	$	166,189		-	$	166,189
Securities sold under agreements to repurchase		841,606		-		841,606
Payables to broker dealers and clearing organizations		536,653		-		536,653
Payables to customers		17,583		(17,583)		-
Financial instruments sold, not yet purchased, at fair value		1,756,647		-		1,756,647
Accounts payable and accrued expenses and other liabilities		239,004		15,524		254,528
Debt		480,987		-		480,987
Total Liabilities	$	4,038,669	$	(2,059)	$	4,036,610

Total identified assets acquired, net of assumed liabilities	$	1,252,284	$	14,726	$	1,267,010

Goodwill	$	143,012	$	(14,726)	$	128,286

Total Purchase Price	$	1,395,296	$	-	$	1,395,296

Amounts allocated to intangible assets, the amortization period and goodwill were as follows


			Amortization
(in thousands)		Amount	Years
Technology	$	67,700	1-6 years
Customer relationships		94,000	13 - 17 years
Trade names		1,000	10 years
Favorable leases		5,895	2-15 years
Exchange memberships		6,400	Indefinite
Intangible assets	$	174,995
Goodwill		128,286
Total	$	303,281

Of the total Goodwill of $128.3 million, $96.2 million has been assigned to the Market Making segment and $32.1 million has been assigned to the Execution Services segment. Such goodwill is attributable to the expansion of products offerings and expected synergies of the combined workforce, products and technologies of the Company and KCG.

Tax treatment of the Acquisition

The Company believes that the Acquisition will be treated as a tax-free transaction to the Company that does not result in a step up in tax basis in the acquired assets and, therefore, KCG’s tax basis in its assets and liabilities generally carries over to the Company following the Acquisition. None of the goodwill is expected to be deductible for tax purposes.

The Company recorded net deferred tax assets of $23.9 million with respect to recording KCG’s assets and liabilities under the purchase method of accounting as described above as well as recording the value of other tax attributes acquired as a result of the Acquisition, as described in Note 13 “Income Tax”.

Pro forma results

Included in the Company’s results for the year ended December 31, 2017 are results from the business acquired as a result of the Acquisition, from the Closing Date through December 31, 2017 as follows:



(in thousands)
Revenues	$	379,203
Income before income taxes and noncontrolling interest		14,340

The financial information in the table below summarizes the combined pro forma results of operations of the Company and KCG, based on adding the pre-tax historical results of KCG and the Company, and adjusting primarily for amortization of intangibles created in the Acquisition, debt raised in conjunction with the Acquisition and nonrecurring costs associated with the Acquisition, which comprise advisory and other professional fees incurred by the Company and KCG of $24.2 and $22.5 million, respectively. The pro forma data assumes all of KCG’s issued and outstanding shares of Class A common stock, par value $0.01 per share were cancelled and extinguished and converted into the right to receive $20.00 in cash, without interest, less any applicable withholding taxes on January 1, 2016 and does not include adjustments to reflect the Company's operating costs or expected differences in the way funds generated by the Company are invested.

This pro forma financial information is based on estimates and assumptions that have been made solely for purposes of developing such pro forma information, including, without limitation, preliminary purchase accounting adjustments. The pro forma financial information does not reflect any synergies or operating cost reductions that may be achieved from the combined operations. The pro forma financial information combines the historical results for the Company and KCG for the years ended December 31, 2017 and 2016:


	For the Years Ended
(in thousands, except per share amounts)		2017		2016
Revenue	$	1,528,588	$	2,153,008

Net income (loss)		(14,151)		443,101

Net income (loss) attributable to common stockholders		(5,219)		163,407