Business Combinations

9 Months Ended

Sep. 27, 2014

Business Combinations [Abstract]

Business Combinations

NOTE 2. Business Combinations  

Acquisition of RAID Software License

On September 4, 2014 (the “Effective Date”), PMC completed a transaction agreement with Hewlett-Packard Company (“HP”) to license core HP Smart Array (“RAID”) software, firmware and management technology (the “Transaction”). With this technology, as well as with certain key employees who worked for HP as lead RAID software development engineers and who were transferred to PMC, PMC can provide more system value to new and existing enterprise, Hyperscale data center and channel customers.

Acquisition Consideration

The total acquisition consideration for the Transaction is $52 million cash, payable in installments as follows:

		(in millions)
Effective Date	$	10
January 10, 2015		18
January 10, 2016		12
January 10, 2017		12

Payment of the above installments is not subject to any contingencies. Because the installment payments span more than one year, the Company determined the purchase-date fair value of the acquisition consideration by discounting the future payments utilizing an interest rate of 3.0%, which is considered to be representative of the interest rate of a typical market participant. The difference between the total cash installment payments of $52 million and the fair value of $50.5 million as of the Effective Date will be charged to interest expense in 2014-2017. Transaction-related costs of approximately $0.6 million were expensed as incurred in the second and third quarters of 2014 and are included in selling, general and administrative expense.

Preliminary Allocation of Acquisition Consideration

The Transaction qualifies as a business combination and was accounted for using the acquisition method. The preliminary allocation of the acquisition consideration to the estimated fair value of assets acquired by major class as of the date of the Transaction is disclosed in the table below. There were no liabilities assumed in the Transaction.

		(in thousands)
Other current assets	$	337
Equipment		873
Goodwill		4,390
Intangible assets		44,900
Total assets	$	50,500
Total acquisition consideration (discounted)	$	50,500

Acquired Intangible Assets

The identified intangible assets acquired were recognized at their fair values and are being amortized on a straight-line basis over their estimated useful lives as follows:

		Estimated fair value (in thousands)	Weighted average useful life
License of existing technologies	$	39,800	7 years
Customer relationship		3,800	10 years
RAID license payments		1,300	8 years
Total intangible assets		44,900

The license of existing technologies asset includes patents, business processes, tools, and proprietary business methods related to RAID software. In addition to the current products, the licensed technologies can be leveraged to assist and improve existing services and create future generation products. The valuation assumptions included information on revenues from existing products and future expected revenue and technology migration trends for each technology. Management applied an18% discount rate to value the license of existing technology assets, which took into consideration market rates of return on debt and equity capital and the risk associated with achieving forecasted revenues related to these assets.

The customer relationship asset relates primarily to the underlying customer relationship with HP. The preliminary estimated fair value of the customer relationship represents the sum of the present value of the expected cash flows attributable to this customer relationship. The cash flows were determined from the revenue and profit forecasts that are expected to be generated from the customer relationship and were valued by applying a discount rate of 15%.

The RAID license payments piece of intangible assets relates to annual RAID software fees receivable from HP to incorporate the Company’s RAID software into HP products not incorporating Company hardware and were valued by applying a discount rate of 15%.  

Goodwill

The Company’s primary reasons for the Transaction were to expand its relationship with HP and to provide additional opportunities for increased revenue through future sales to customers other than HP. As referenced above, included in the Transaction was an assembled workforce of five key employees which provides the Company with intellectual resources for the development of the next generation of the Company’s RAID software (Smart RAIDTM), as well as operational synergies. These factors were the basis for the recognition of goodwill. Goodwill is expected to be deductible for tax purposes over a period of 15 years. The acquired goodwill was allocated to our Enterprise Storage Products market segment.

 Pro forma disclosures

The Transaction would not have a significant impact on PMC’s net revenues or net earnings (loss) for the periods where pro forma disclosures would be required. Revenues and related expenses for the third quarter of 2014 from the Effective date were immaterial.

Other Agreement

Upon the closing of the Transaction, the Company also entered into an agreement with HP related to services and non-recurring engineering (“NRE”) which provides the framework for the development of future generations of RAID software for HP for a period of approximately two years from the Effective Date. During this period, HP will make cost reimbursement payments to the Company totaling $25 million, which are receivable in installments through April 2016. The services and NRE agreement is considered to be a market rate contract for services to be provided in the future, thus not having an impact on the acquisition consideration allocation, and will be accounted for prospectively as such services are delivered and related payments are received.

Acquisition of Integrated Device Technology, Inc’s Enterprise Flash Controller Business

On July 12, 2013, PMC completed the acquisition of Integrated Device Technology, Inc.’s (“IDT”), Enterprise Flash Controller and PCI Express Switch businesses, including the world’s first NVM Express (NVMe) flash controller for total purchase consideration of approximately $96 million which was accounted for using the acquisition method.  With the addition of these controllers to our storage network products, PMC positioned itself for leadership in the rapidly growing market for enterprise flash controllers.