Acquisitions

3 Months Ended

Mar. 31, 2012

Acquisitions

Acquisitions

(2)   Acquisitions

Acquisition of Savvis

        On July 15, 2011, we acquired all of the outstanding common stock of Savvis, a provider of cloud hosting, managed hosting, colocation and network services in domestic and foreign markets. We believe this acquisition enhances our ability to provide information technology services to our existing business customers and strengthens our opportunities to attract new business customers in the future. Each share of Savvis common stock outstanding immediately prior to the acquisition converted into the right to receive $30 per share in cash and 0.2479 shares of CenturyLink common stock. The aggregate consideration of $2.382 billion was based on:

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  cash payments of $1.732 billion;

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  the 14.313 million shares of CenturyLink common stock issued to consummate the acquisition;

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  the closing stock price of CenturyLink common stock at July 14, 2011 of $38.54; and

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  the estimated net value of the pre-combination portion of certain share-based compensation awards assumed by CenturyLink of $98 million, of which $33 million was paid in cash.

        Upon completing the acquisition, we also paid $547 million to retire certain pre-existing Savvis debt and accrued interest, and paid related transaction expenses totaling $15 million. The cash payments required on or about the closing date were funded using existing cash balances, which included the net proceeds from our June 2011 issuance of senior notes with an aggregate principal amount of $2.0 billion.

        We have recognized the assets and liabilities of Savvis based on our preliminary estimates of their acquisition date fair values. The determination of the fair values of the assets acquired and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As such, we have not completed our valuation analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair value of Savvis' assets acquired and liabilities assumed, along with the related allocations to goodwill and intangible assets. The fair values of certain tangible assets, intangible assets, contingent liabilities and residual goodwill are the most significant areas not yet finalized and therefore are subject to change. We expect to complete our final fair value determinations no later than the second quarter of 2012. Our final fair value determinations may be significantly different than those reflected in our consolidated financial statements at March 31, 2012.

        Based on our preliminary estimate, the aggregate consideration exceeds the aggregate estimated fair value of the assets acquired and liabilities assumed by $1.343 billion, which we have recognized as goodwill. This goodwill is attributable to strategic benefits, including enhanced financial and operational scale and product and market diversification that we expect to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes.

        The following is our preliminary assignment of the aggregate consideration:

	July 15, 2011
	(Dollars in millions)
Cash, accounts receivable and other current assets	$	214
Property, plant and equipment		1,377
Identifiable intangible assets:
Customer relationships		739
Other		51
Other noncurrent assets		27
Current liabilities, excluding current maturities of long-term debt		(129	)
Current maturities of long-term debt		(38	)
Long-term debt		(840	)
Deferred credits and other liabilities		(362	)
Goodwill		1,343
Aggregate consideration	$	2,382

        During the first quarter of 2012, we retrospectively adjusted our previously reported preliminary assignment of the aggregate Savvis consideration for changes to our original estimates of the fair value of certain customer relationships, capital leases, leasehold improvements and deferred tax liabilities at the acquisition date. These changes are the result of additional information obtained since the filing of our Form 10-K for the year ended December 31, 2011. Our July 15, 2011, customer relationships decreased $55 million, our property, plant and equipment increased $42 million and our deferred credits and other liabilities decreased by $26 million due to these revisions in our estimates. The adjustment to intangible assets and property, plant and equipment valuations and the resulting application of depreciation and amortization expense did not result in a material change to previously reported depreciation and amortization expense. Goodwill decreased by $14 million as an offset to the above mentioned changes.

Acquisition of Qwest

        On April 1, 2011, we acquired all of the outstanding common stock of Qwest, a provider of data, Internet, video and voice services nationwide and globally. We entered into this acquisition, among other things, to realize certain strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks. As of the acquisition date, Qwest served approximately 9.0 million access lines and approximately 3.0 million broadband subscribers across 14 states. Each share of Qwest common stock outstanding immediately prior to the acquisition converted into the right to receive 0.1664 shares of CenturyLink common stock, with cash paid in lieu of fractional shares. The aggregate consideration of $12.273 billion was based on:

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  the 294 million shares of CenturyLink common stock issued to consummate the acquisition;

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  the closing stock price of CenturyLink common stock at March 31, 2011 of $41.55;

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  the estimated net value of the pre-combination portion of share-based compensation awards assumed by CenturyLink of $52 million (excluding the value of restricted stock included in the number of issued shares specified above); and

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  cash paid in lieu of the issuance of fractional shares of $5 million.

        We assumed approximately $12.7 billion of long-term debt in connection with our acquisition of Qwest.

        In the first quarter of 2012, we completed our valuation of the fair value of Qwest's assets acquired and liabilities assumed, along with the related allocations to goodwill and intangible assets. The aggregate consideration exceeded the aggregate estimated fair value of the assets acquired and liabilities assumed by $10.123 billion, which we have recognized as goodwill. This goodwill is attributable to strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks that we expect to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes.

        The following is our assignment of the aggregate consideration:

	April 1, 2011
	(Dollars in millions)
Cash, accounts receivable and other current assets*	$	2,121
Property, plant and equipment		9,529
Identifiable intangible assets:
Customer relationships		7,558
Capitalized software		1,702
Other		189
Other noncurrent assets		390
Current liabilities, excluding current maturities of long-term debt		(2,426	)
Current maturities of long-term debt		(2,422	)
Long-term debt		(10,253	)
Deferred credits and other liabilities		(4,238	)
Goodwill		10,123
Aggregate consideration	$	12,273

*

Includes estimated fair value of $1.194 billion for accounts receivable which had gross contractual value of $1.274 billion on April 1, 2011. The $80 million difference between the gross contractual value and the estimated fair value assigned represents our best estimate as of April 1, 2011 of contractual cash flows that would not be collected.

        During the first quarter 2012, we retrospectively adjusted our previously reported preliminary assignment of the aggregate Qwest consideration for changes to our original estimates of the fair value of certain items at the acquisition date. These changes are the result of additional information obtained since the filing of our Form 10-K for the year ended December 31, 2011. Identifiable intangible assets decreased due to a $67 million decrease in our customer relationships valuation. Property, plant and equipment decreased by $25 million primarily from a revision to our valuation of our buildings. Deferred credits and other liabilities decreased by $63 million primarily from changes in tax liabilities and a revision to one of our lease valuations. Goodwill increased by $17 million as an offset to the above mentioned changes. The depreciation and amortization expense impact of the adjustments to intangible assets and property, plant and equipment valuations did not result in a material change to previously reported amounts.

        On the acquisition date, we assumed several of the contingencies of Qwest. For more information on our contingencies, see Note 10—Commitments and Contingencies.

References to Acquired Businesses

        In the discussion that follows, we refer to the business that we operated prior to the Qwest acquisition as "Legacy CenturyLink" and refer to the incremental business activities that we now operate as a result of the Savvis acquisition and the Qwest acquisition as "Legacy Savvis" and "Legacy Qwest", respectively.

Combined Pro Forma Operating Results

        For the three months ended March 31, 2012, CenturyLink's results of operations included operating revenues (net of intercompany eliminations) attributable to Qwest and Savvis of $2.7 billion and $266 million, respectively. The addition of Qwest and Savvis post-acquisition operations did not contribute significantly to our consolidated net income.

        The following unaudited pro forma financial information for the first quarter of 2011 presents the combined results of CenturyLink as if the Qwest and Savvis acquisitions had been consummated as of January 1, 2010.

	Three Months Ended March 31,
	Actual		Pro Forma
	2012		2011
	(Dollars in millions)
Operating revenues	$	4,610		4,737
Net income		200		275
Basic earnings per common share		.32		.45
Diluted earnings per common share		.32		.44

        This pro forma information reflects certain adjustments to previously reported historical operating results, consisting of primarily:

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  decreased operating revenues and expenses due to the elimination of deferred revenues and deferred expenses associated with installation activities and capacity leases that were assigned no value at the acquisition date and the elimination of transactions among CenturyLink, Qwest and Savvis that are now subject to intercompany elimination;

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  increased amortization expense related to identifiable intangible assets, net of decreased depreciation expense to reflect the fair value of property, plant and equipment;

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  decreased recognition of retiree benefit expenses for Qwest due to the elimination of unrecognized actuarial losses;

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  decreased interest expense primarily due to the amortization of an adjustment to reflect the increased fair value of long-term debt of Qwest recognized on the acquisition date; and

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  the related income tax effects.

        The pro forma information does not necessarily reflect the actual results of operations had the Qwest and Savvis acquisitions been consummated at January 1, 2010, nor is it necessarily indicative of future operating results. The pro forma information does not adjust for integration costs incurred by us, Qwest and Savvis during 2011 (which are further described elsewhere in this report) or integration costs to be incurred by us in future periods. In addition, the pro forma information does not give effect to any potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisitions.

        For the three months ended March 31, 2012 and 2011 we incurred acquisition related expenses, consisting primarily of integration and severance related expenses, of $39 million and $35 million, respectively. The total amounts of these expenses are recognized in our costs of services and products and selling, general and administrative expenses.