Acquisitions

The Company accounts for business acquisitions in accordance with the acquisition method of accounting as prescribed by FASB ASC Topic 805, Business Combinations. The acquisition method of accounting requires the Company to record the net assets and liabilities acquired based on their estimated fair values as of the acquisition date, with any excess of the consideration transferred over the estimated fair value of the net assets acquired, including identifiable intangible assets, to be recorded to goodwill. Under the acquisition method, the operating results of acquired companies are included in the Company's consolidated financial statements beginning on the date of acquisition.

The Company completed the following business acquisitions during the six months ended June 30, 2017:

CEB

On April 5, 2017, the Company acquired 100% of the outstanding capital stock of CEB for an aggregate purchase price of $3.5 billion. The consideration transferred by Gartner at close included approximately $2.69 billion paid in cash and $818.7 million in fair value of Gartner common shares. CEB was a publicly-held company headquartered in Arlington, Virginia with approximately 4,900 employees. CEB's primary business is to serve as a leading provider of subscription-based, best practice research and analysis focusing on human resources, sales, finance, IT, and legal. CEB serves executives and professionals at more than 10,000 large corporate and middle market institutions in over 70 countries.

On March 9, 2017, the Company acquired 100% of the outstanding capital stock of L2, a privately-held firm based in New York City with 150 employees, for an aggregate purchase price of $134.2 million. L2 is a subscription-based research business that benchmarks the digital performance of brands.

Total Consideration Transferred

The following table summarizes the aggregate consideration paid or payable for these acquisitions (in thousands):



Aggregate consideration (1):	CEB		L2		Total
Cash paid at close (2), (3)	$	2,687,704	$	134,199	$	2,821,903
Additional cash to be paid (2)	12,465		—		12,465
Fair value of Gartner equity awards (4)	818,660		—		818,660
Total (5)	$	3,518,829	$	134,199	$	3,653,028


(1)	Includes the total consideration transferred or to be transferred for 100% of the outstanding capital stock of the acquired businesses.


(2)	The cash paid at close represents the gross contractual amount paid. Net of cash acquired from these businesses and for cash flow reporting purposes, the Company paid $2.62 billion in cash at close for these two businesses. The Company expects the additional $12.5 million in cash to be paid in the third quarter of 2017.


(3)	The Company borrowed a total of approximately $2.78 billion in conjunction with the CEB acquisition (see Note 7 — Debt for additional information).


(4)	Consists of the fair value of (i) Gartner common stock issued (see Note 8 — Equity for additional information) and (ii) stock-based compensation replacement awards.


(5)	The Company may also be required to pay up to an additional $20.8 million in cash for L2 which is contingent on the achievement of certain employment conditions by several key employees. This amount is being recognized as compensation expense over approximately three years.

The allocation of the purchase price for CEB and L2 are preliminary with respect to various matters, to include the valuation of goodwill and intangible assets and property, equipment, and leasehold improvements; tax contingencies; and other items. The Company expects to complete the allocation of the purchase price for both L2 and CEB in late 2017 or early 2018.

Preliminary Allocation of Purchase Price

The following table summarizes the preliminary allocation of the purchase price to the fair value of the assets acquired and liabilities assumed for these acquisitions (in thousands):



	CEB (3)		L2 (4)		Total
Assets:
Cash	$	194,706	$	4,852	$	199,558
Fees receivable	176,867		8,277		185,144
Prepaid expenses and other current assets	31,293		1,167		32,460
Property, equipment and leasehold improvements	59,800		663		60,463
Goodwill (1)	2,318,195		109,779		2,427,974
Finite-lived intangible assets (2)	1,574,000		15,890		1,589,890
Other assets	157,373		12,321		169,694
Total assets	$	4,512,234	$	152,949	$	4,665,183
Liabilities:
Accounts payable and accrued liabilities	$	132,875	$	3,050	$	135,925
Deferred revenues (current)	247,344		13,200		260,544
Other liabilities	613,186		2,500		615,686
Total liabilities	$	993,405	$	18,750	$	1,012,155
Net assets acquired	$	3,518,829	$	134,199	$	3,653,028

(1)

The Company believes the goodwill resulting from the acquisitions is supportable based on anticipated synergies. For CEB, among the factors contributing to the anticipated synergies are a broader market presence, expanded product offerings and market opportunities, and an acceleration of CEB's growth by leveraging Gartner's global infrastructure and best practices in sales productivity and other areas. None of the recorded goodwill is expected to be deductible for tax purposes. See Note 6 — Goodwill and Intangible Assets for additional information.

(2)

All of the acquired intangible assets are finite-lived. The determination of the fair value of the finite-lived intangible assets required management judgment and the consideration of a number of factors. In determining the fair values, management primarily relied on income valuation methodologies, in particular discounted cash flow models. The use of discounted cash flow models required the use of estimates, significant among them projected cash flows related to the particular asset; the useful lives of the particular assets; the selection of royalty and discount rates used in the models; and certain published industry benchmark data. In establishing the estimated useful lives of the finite-lived intangible assets, the Company relied on both internally-generated data for similar assets as well as certain published industry benchmark data. We believe the values we have assigned to the finite-lived intangible assets are both reasonable and supportable. See Note 6 — Goodwill and Intangible Assets for additional information regarding the finite-lived intangible assets.

(3)

The Company's financial statements include the operating results of CEB beginning on April 5, 2017, the date of acquisition. CEB's operating results and the related goodwill are being reported as part of the Company's Research, Events, and Talent Assessment & Other segments. In total, the acquisition of CEB added approximately $152.6 million of additional revenue in each of the three and six months ended June 30, 2017. Had the Company acquired CEB in prior periods, the impact to the Company's operating results would have been material, and as a result the following unaudited pro forma financial information is presented as if CEB had been acquired by the Company on January 1, 2016 (in thousands, except per share amounts):



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Pro forma total revenue	$	934,930		$	761,090		$	1,773,517		$	1,479,047
Pro forma net (loss)	(1,083		)	(82,115		)	(35,477		)	(152,754		)
Pro forma basic and diluted (loss) per share	(0.01		)	(0.91		)	(0.38		)	(1.70		)

The pro forma results have been prepared in accordance with U.S. GAAP and include the following pro forma adjustments:

(a) An increase in interest expense and amortization of debt issuance costs related to the financing of the CEB acquisition. Note 7 — Debt provides further information regarding the Company's borrowings related to the CEB acquisition;

(b) A decrease in revenue as a result of the preliminary purchase price allocation for deferred revenue;

(c) An adjustment for additional depreciation and amortization expense as a result of the preliminary purchase price allocation for finite-lived intangible assets and property, equipment, and leasehold improvements.

(4)

The Company's financial statements include the operating results of L2 beginning on March 9, 2017, the acquisition date. L2's operating results were not material to the Company's consolidated operating results and segment results for either the three and six months ended June 30, 2017. Had the Company acquired L2 in prior periods, the impact to the Company's operating results would not have been material, and as a result pro forma financial information for L2 for prior periods has not been presented. L2's operating results and the related goodwill are being reported as part of the Company's Research segment.

The Company recognized $98.3 million and $111.6 million of acquisition and integration charges in the three and six months ended June 30, 2017, respectively, compared to $8.0 million and $16.4 million in the three and six months ended June 30, 2016. The additional charges during 2017 primarily consisted of higher professional fees, severance, stock-based compensation charges, and an accrual for exit costs of approximately $20.8 million for office space that the Company does not intend to occupy at a new building in Arlington. To date the Company has not made any payments related to the excess space.