Acquisitions and Divestiture

12 Months Ended

Dec. 31, 2019

Mergers, Acquisitions And Dispositions Disclosures [Abstract]

ACQUISITIONS AND DIVESTITURE

ACQUISITIONS AND DIVESTITURES

Acquisitions

Year Ended December 31, 2019

On October 1, 2019, the Company acquired 100% of the outstanding membership interests of TOPO Research LLC ("TOPO"), a privately-held company based in Redwood City, California, for $25.0 million. TOPO is a subscription-based research and advisory business. The acquisition of TOPO expanded our market presence, product offerings and other business opportunities.

For cash flow reporting purposes, the Company paid $23.7 million in cash for TOPO after considering the cash acquired with the business and certain other purchase price adjustments at closing. In addition to the purchase price, the Company may also be required to pay up to $6.5 million in cash in the future based on the continuing employment of certain key employees. Such amount will be recognized as compensation expense over two years and will be reported in Acquisition and integration charges in the Consolidated Statements of Operations.

As of December 31, 2019, the allocation of the purchase price for the TOPO acquisition is preliminary with respect to certain tax matters and the finalization of working capital adjustments. The table below summarizes the preliminary purchase price allocation based on the fair value of the assets acquired and liabilities assumed (in thousands).

Assets:
Cash	$	1,281
Fees receivable	1,402
Prepaid expenses and other assets	166
Goodwill (1)	19,293
Finite-lived intangible assets (2)	5,250
Total assets acquired	27,392
Total liabilities assumed (primarily deferred revenues)	2,417
Net assets acquired	$	24,975

(1) We believe that the recorded goodwill is supported by the anticipated synergies resulting from the acquisition. All of the recorded goodwill is expected to be deductible for tax purposes.

(2) The acquired finite-lived intangible assets primarily consisted of customer relationships and content, which are being amortized over 6 years and 1.5 years, respectively. To determine the fair values of the acquired intangible assets, we primarily relied on income valuation methodologies, in particular, discounted cash flow models.

The operating results of the acquired TOPO business and the related goodwill are being reported as part of the Company's Research and Conferences segments. The operating results of TOPO have been included in the Company's consolidated financial statements since the date of acquisition; however, such operating results were not material to the Company's consolidated operating results and segment results. Had the Company acquired TOPO in prior periods, the impact on the Company's operating results would not have been material and, as a result, pro forma financial information for prior periods has not been presented herein.

During 2019, the Company also paid $2.3 million of restricted cash for deferred consideration from a 2017 acquisition.

Year Ended December 31, 2018

Although the Company did not complete any business acquisitions during 2018, it paid $15.9 million of restricted cash during that year for deferred consideration from a 2017 acquisition.

Year Ended December 31, 2017

CEB Inc. ("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 included approximately $2.7 billion in cash and Gartner common shares with a fair value of $818.7 million. CEB was a publicly-traded company headquartered in Arlington, Virginia with approximately 4,900 employees. CEB's primary business was to serve as a leading provider of subscription-based, best practice research and analysis focusing on human resources, sales, finance, IT and legal. CEB served executives and professionals at corporate and middle market institutions in over 70 countries.

L2, Inc. ("L2")

On March 9, 2017, the Company acquired 100% of the outstanding capital stock of L2, a privately-held company 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 table below summarizes the aggregate consideration transferred for the Company's acquisitions during 2017 (in thousands).

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

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

(2) The cash paid at close represents the gross contractual amount paid. The Company paid an additional $12.5 million in cash during the third quarter of 2017. Net of cash acquired and for cash flow reporting purposes, the Company paid a total of approximately $2.64 billion in cash for acquisitions in 2017.

(3) The Company borrowed a total of approximately $2.8 billion in conjunction with the CEB acquisition (see Note 6 — Debt for additional information).

(4) Consists of the fair value of (i) Gartner common stock issued and (ii) stock-based compensation replacement awards. As part of the consideration for the CEB acquisition, the Company issued approximately 7.4 million shares of its common stock at a fair value of $109.65 per common share. The fair value of the Company's common stock was determined based on an average of the high and low prices of the common stock as reported by the New York Stock Exchange on April 5, 2017, the date of the acquisition.

Allocation of Purchase Price

The table below summarizes the allocation of the aggregate purchase price for the CEB and L2 acquisitions to the fair value of the assets acquired and liabilities assumed (in thousands).

	CEB (3)		L2 (4)		Total
Assets:
Cash	$	194,706	$	4,852	$	199,558
Fees receivable	175,440		8,277		183,717
Prepaid expenses and other current assets	53,610		1,167		54,777
Property, equipment and leasehold improvements	51,399		663		52,062
Goodwill (1)	2,349,589		108,202		2,457,791
Finite-lived intangible assets (2)	1,584,300		15,890		1,600,190
Other assets	66,818		13,067		79,885
Total assets	4,475,862		152,118		4,627,980
Liabilities:
Accounts payable and accrued liabilities	142,134		3,050		145,184
Deferred revenues (current)	246,472		13,200		259,672
Other liabilities	568,427		1,669		570,096
Total liabilities	957,033		17,919		974,952
Net assets acquired	$	3,518,829	$	134,199	$	3,653,028

(1) The Company believes that the goodwill resulting from the CEB and L2 acquisitions is supportable based on synergies that were anticipated prior to the respective closing dates. For CEB, among the factors contributing to the anticipated synergies were 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 goodwill is deductible for tax purposes.

(2) All of the acquired intangible assets were finite-lived. The determination of the fair values of such intangible assets required 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 discounted cash flow models required the use of certain estimates, including projected cash flows related to the asset being evaluated; the useful lives of the affected assets; the selection of royalty and discount rates used in the models; and certain published industry benchmark data. When 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 that the values assigned to the finite-lived intangible assets are both reasonable and supportable.

(3) The Company's consolidated 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 have been reported as part of the Company's Research, Conferences and Other segments. Had the Company acquired CEB in prior periods, the impact on the Company's operating results would have been material. If the Company had acquired CEB on January 1, 2016, the pro forma consolidated financial results for 2017 would have approximated the amounts shown in the table below (in thousands, except per share data).

Pro forma total revenue	$	3,726,470
Pro forma net income	150,167
Pro forma basic and diluted income per share	$	1.66

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 6 — Debt provides further information regarding the Company's borrowings related to the CEB acquisition.

(b) A change in revenue as a result of the required fair value adjustment to deferred revenue.

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

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

Acquisition and Integration Charges

The Company recognized $9.5 million, $107.2 million and $158.5 million of Acquisition and integration charges during 2019, 2018 and 2017, respectively. Acquisition and integration charges reflect additional costs and expenses resulting from our acquisitions and include, among other items, professional fees, severance and stock-based compensation charges. During 2018 and 2017, the charges included $58.3 million and $13.1 million of exit costs for certain acquisition-related office space in Arlington, Virginia that the Company did not occupy. The Company recorded no exit costs for facilities during 2019.

The table below presents a summary of the activity related to our accrual for exit costs at all of our facilities during 2018 and 2017 (in thousands) (1).

	2018			2017
Liability balance at beginning of the year	$	12,961		$	—
Charges and adjustments, net (2)	69,790			13,087
Payments, net of $2,515 in sublease rent during 2018	(26,087		)	(126		)
Liability balance at end of the year (3)	$	56,664		$	12,961

(1) With the adoption of ASU No. 2016-02 on January 1, 2019, the accrual for exit costs was reclassified to offset the Company's right-of-use assets and the present value of our remaining lease payments was recorded as an operating lease liability. Moreover, there were no new exit cost activities during 2019. Note 1 — Business and Significant Accounting Policies and Note 7 — Leases provide additional information regarding the Company's leases and the adoption of ASU No. 2016-02.

(2) During 2018, the Company recognized $7.5 million of expense for changes in the original estimates of its exit cost obligations. The corresponding amount for 2017 was a benefit of $10.1 million.

(3) Through December 31, 2018, in the aggregate, we had expensed $82.9 million and had net cash outlays of $26.2 million related to the exit cost activities at all of our facilities.

Divestitures

During 2018, the Company completed the divestitures of all three of the non-core businesses comprising its Other segment, each of which were acquired in the CEB acquisition. Revenue from those divested operations was approximately $97.3 million and $165.7 million in 2018 and 2017, respectively, while the gross contribution was $60.5 million and $86.5 million, respectively. The Company used the cash proceeds from these divestitures to pay down debt.

Additional information regarding the Other segment divestitures is provided below.

CEB Challenger training business

On August 31, 2018, the Company sold its CEB Challenger training business for $119.1 million and realized approximately $116.0 million in cash, which is net of working capital adjustments and certain closing costs. The Company recorded a pretax gain on the sale of approximately $8.3 million.

CEB Workforce Survey and Analytics business

On May 1, 2018, the Company sold its CEB Workforce Survey and Analytics business for $28.0 million and realized approximately $26.4 million in cash, which is net of certain closing costs. The Company recorded a pretax gain on the sale of approximately $8.8 million.

CEB Talent Assessment business

On April 3, 2018, the Company sold its CEB Talent Assessment business for $403.0 million and realized approximately $375.8 million in cash from the sale, which is net of cash transferred with the business and certain closing costs. The Company recorded a pretax gain of approximately $15.5 million on the sale.

Other asset sales

During 2018, the Company also received $8.6 million in cash proceeds as well as other consideration and recorded a net pretax gain of approximately $12.8 million from the sale of certain non-core assets originally acquired in the CEB transaction. These amounts include the sale of a small Research segment product called Metrics That Matter on October 31, 2018.