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 four installments as follows:



Effective Date	$	10,000
January 10, 2015		18,000
January 10, 2016		12,000
January 10, 2017		12,000

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 2014 and are included in selling, general and administrative expense.

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.



Intangible assets	$	44,900
Equipment		873
Other current assets		337
Goodwill		4,390
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	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 the 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 an 18% 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 component 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 the Company’s Enterprise Storage Products market segment.

Pro forma disclosures

The Transaction would not have a significant impact on PMC’s net revenues or net income (loss) for the periods where pro forma disclosures would be required. Revenues and related expenses for 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 (i) substantially all of the assets used by Integrated Device Technology, Inc., a Delaware corporation (“Seller”), and its subsidiaries, in the business of designing, developing, manufacturing, testing, marketing, supporting, maintaining, distributing, provisioning and selling non-volatile memory (flash) controllers and (ii) all technology and intellectual property rights owned by Seller or any of its subsidiaries and used exclusively in, or developed exclusively for use in, (a) switching circuits having the primary function of flexible routing of data from/to multiple switch interface ports, where all switch interface ports conform to the PCIe protocol, or (b) circuits having the primary function of executing all of the capturing, re-timing, re-generating and re-transmitting PCIe signals to help extend the physical reach of the signals in a system (the “Acquisition”), pursuant to the Asset Purchase Agreement with Seller and Integrated Device Technology (Malaysia) Sdn. Bhd., a wholly-owned subsidiary of Seller (“Selling Subsidiary” and, together with PMC, PMC’s subsidiaries and Seller, the “Parties”) dated May 29, 2013. The Parties also entered into a license agreement, effective upon the closing of the Acquisition, whereby Seller and Selling Subsidiary will license certain intellectual property rights and technology to PMC, and PMC will license back to Seller and Selling Subsidiary certain of the intellectual property rights and technology acquired by PMC in the Acquisition. Upon the closing of the Acquisition, the Parties also entered into (a) a transition services agreement and (b) a supply agreement, whereby Seller and Selling Subsidiary provide services to PMC at the option of PMC.

PMC’s completion of the Acquisition accelerates the Company’s product offering in the Enterprise Flash Controller and PCI Express Switch businesses, including the world’s first NVM Express (NVMe) flash controller.

Acquisition consideration

The total fair value of consideration paid for the Acquisition was approximately $96,098 in cash funded by PMC’s available working capital.

Acquisition-related costs of approximately $3.2 million were expensed as incurred in 2013 and are included in selling, general and administrative expense.

Allocations of acquisition consideration

The purchase of the IDT assets was accounted for using the acquisition method, and the allocation of fair value of consideration paid to the estimated fair value of related assets acquired and liabilities assumed as of the date of the Acquisition in the table below reflect various estimates and analyses, including work performed by third-party valuation specialists.


Current assets	$	2,423
Intangible assets		67,400
Goodwill		26,430
Total assets		96,253
Assumed liabilities		155
Total acquisition consideration	$	96,098

The amortizable intangible assets are being amortized on a straight line basis over their estimated useful lives as follows:


	Estimated		Weighted average
	fair value		useful life
Order backlog	$	100	< 1 year
Existing technology		700	2 years
Customer relationships		3,400	7 years
Core technology		63,200	7 years
Total intangible assets	$	67,400

Acquired Intangible Assets

The existing and core technologies include patents, business processes and tools, and proprietary business methods. In addition to the current products, the acquired developed 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 trends for each technology, with an estimated useful life of between two and seven years. Management applied discount rates of 14% and 16% respectively to value the existing and core 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.

Customer relationships assets relate primarily to underlying customer relationships. The preliminary estimated fair value of the customer relationships represents the sum of the present value of the expected cash flows attributable to those customer relationships. The cash flows were determined from the revenue and profit forecasts associated with growth opportunities that are expected to be generated from these customer relationships. The Company used the same method to determine the fair value of this intangible asset as the developed technologies and utilized a discount rate of 16%.

Goodwill

The Company’s primary reasons for the Acquisition was to accelerate the Company’s time-to-market with early product leadership and a robust design win pipeline, including wins spanning tier one Data Center, original equipment manufacturer (OEM), and solid-state drive (SSD) customers. The Acquisition also enhanced the Company’s engineering team through the addition of research and development resources. These factors were the basis for the recognition of goodwill. The goodwill is expected to be deductible for tax purposes over 15 years. The acquired goodwill was allocated to our Enterprise Storage Products market segment.

Proforma disclosures

The results of operations of the Acquisition have been included in PMC’s consolidated results of operations since the acquisition date. The Acquisition did not have a significant impact on PMC’s net revenues or net income (loss) for the periods where pro forma disclosures would be required. Net revenues for 2013 from the Acquisition date were $4.9 million and increased our net loss for the same period was $2.0 million. Included in net loss was $4.6 million related to amortization of purchased intangible assets, $0.8 million of fair value adjustments on acquired inventory, and $1.5 million of payroll accruals.