BUSINESS COMBINATIONS

Newport Media, Inc.

On July 31, 2014, the Company acquired 100% equity interest in privately-held Newport Media, Inc. (“NMI”), a provider of low power Wi-Fi and Bluetooth solutions that are expected to enhance the Company’s portfolio of wireless products.

The purchase consideration, net of cash acquired, consisted of $139.6 million payable in cash at closing of the acquisition, subject to working capital adjustments and deductions for specified closing expenses. In addition, the acquisition agreement provides for an aggregate cash earn-out payment of up to $30.0 million payable if specified revenue targets are achieved over the next two years. The Company recorded a liability of $0.4 million as of December 31, 2014, representing the estimated fair value of the earn-out based on the probability of achievement as of the acquisition date.

The total purchase price, before working capital adjustments and deduction for specified closing expenses, of the acquisition equaled:



	July 31, 2014
	(in thousands)
Cash, including cash acquired of $3.0 million	$	142,639
Fair value of earn-out	420
Total purchase price	$	143,059

The purchase price was allocated to the identifiable assets and liabilities based on their estimated fair value at the acquisition date. The Company engaged in an independent third party to assist with the determination of the fair value of certain identifiable intangible assets and the earn-out. In determining the fair value of the purchased intangible assets and earn-out, management made various estimates and assumptions from significant unobservable inputs (Level 3). The fair value of purchased identifiable intangible assets was determined using discounted cash flow models from projections prepared by management. The fair value of the earn-out was derived using an option pricing model that includes significant unobservable inputs.

The purchase price was allocated as of the date of the acquisition as follows:



	July 31, 2014
	(in thousands)
Current assets	$	12,287
Fixed assets	983
Intangible assets acquired:
Distributor and end-customer relationships	3,910
Backlog	1,670
Non-compete agreements	1,000
Trade name	300
Developed technology	10,910
In-process technology	13,690
Goodwill	86,123
Deferred tax assets	17,863
Other long-term assets	945
Current liabilities	(5,216		)
Other liabilities assumed	(1,406		)
	$	143,059

The Company prepared an initial determination of the fair value of the assets acquired and liabilities assumed as of the acquisition date using preliminary information. The Company has recognized measurement period adjustments made during the fourth quarter of 2014 to the fair value of certain assets acquired and liabilities assumed as a result of further refinements in the Company’s estimates. These adjustments were retrospectively applied to the July 31, 2014 acquisition date balance sheet. The effect of these adjustments on the preliminary purchase price allocation was a decrease in goodwill and income tax payable of $1.9 million and $0.3 million, respectively, and an increase in deferred tax assets of $1.6 million.

The excess of the fair value of consideration paid over the fair values of net assets and liabilities acquired and identifiable intangible assets resulted in recognition of goodwill of approximately $86.1 million, including workforce, of which $55.2 million is expected to be deductible for tax purposes. The recognition of goodwill primarily related to the expected synergies between the product offerings of NMI and the Company. All the goodwill recorded was assigned to the Company’s Microcontroller segment.

The following table sets forth the components of the identifiable intangible assets subject to amortization which are being amortized on a straight-line basis over their estimated useful lives:



Intangible assets acquired:	Method of Valuation	Discount Rate Used	Estimated Useful Lives
Distributor and end-customer relationships	Income approach	19% - 24%	0.5 - 3 years
Backlog	Income approach	19%	0.5 years
Non-compete agreements	Income approach	24%	1 - 2 years
Trade name	Income approach	24%	1 year
Developed technology	Income approach	22% - 23%	1 - 5 years
In-process technology	Income approach	25%	5 years (1)
(1) In-process technology is not amortized until the associated project has been completed. Alternatively, if the associated project is determined not to be viable, it will be expensed.

The Company expensed $2.5 million of advisory, legal, and consulting fees and other costs directly related to the acquisition, which were recorded as acquisition-related charges in the Consolidated Statements of Operations for the year ended December 31, 2014. The Company also incurred $5.3 million of one-time bonuses, subject to claw-back and other employment-related terms, for certain employees, which will be recorded ratably through the date on which the bonus is no longer recoverable by the Company. For the year ended December 31, 2014, the Company recorded $1.8 million of one-time bonus expense as acquisition-related charges in the Consolidated Statements of Operations.

The Company has included the results of operations of NMI in the Consolidated Statements of Operations from the closing date of the acquisition. Pro forma results of operations have not been presented because their effects on the Consolidated Statement of Operations were not material. For the period from July 31, 2014 to December 31, 2014, NMI products contributed revenue of $15.1 million. Operating income for the same period was immaterial.

Integrated Device Technology's Smart Metering Business

On March 7, 2013, the Company completed the acquisition from Integrated Device Technology (“IDT”) of its smart metering business for a cash purchase price of $10.3 million. This business is included in the Company's Microcontroller segment. The acquisition was intended to enable the Company to offer complementary products and to enhance the Company's existing smart energy product portfolio. Prior to the acquisition, the assets of IDT's smart metering business consisted primarily of approximately 20 employees, inventory, intellectual property assets, customers and distributors and related revenue streams. The acquisition, therefore, qualified as a business for accounting purposes and was accounted for under the acquisition method of accounting.

The purchase price allocation as of the closing date of the acquisition and estimated useful lives of identifiable intangible assets subject to amortization are as follows:



	Purchase Price Allocation			Estimated Useful Lives
	(in thousands)
Total purchase price	$	10,263
Less:
Net tangible assets acquired	(1,374		)
Intangible assets acquired:
Customer relationships	(1,200		)	3 years
Developed technologies	(2,100		)	6 years
Backlog	(200		)	1 year or less
Total intangible assets	(3,500		)
Goodwill	$	5,389

The total purchase price paid by the Company exceeded the estimated fair value of the intangible assets of the acquired business, which were $3.5 million, and net tangible assets which were $1.4 million. Based on the foregoing, as part of the purchase price allocation, the Company allocated $5.4 million of the purchase price to goodwill.

Ozmo, Inc.

On December 20, 2012, the Company completed the acquisition of Ozmo, Inc ("Ozmo"), a provider of ultra-low Wi-Fi Direct solutions for approximately $64.4 million in cash, of which $15.6 million was paid in the first quarter of 2013. Ozmo's business is included in the Company's Microcontroller segment. The acquisition of Ozmo was intended to enable the Company to offer complementary products, to enhance the Company's existing wireless product portfolio, and potentially to accelerate time-to-market for future wireless microcontroller products that may integrate Ozmo technologies. Prior to the acquisition, Ozmo's assets consisted primarily of approximately 50 employees, patents and other intellectual property assets related to the development of Wi-Fi technologies. The acquisition, therefore, qualified as a business for accounting purposes and was accounted for under the acquisition method of accounting.

A total of $7.7 million of the purchase consideration was distributed into an escrow account to meet any indemnification claims. The escrow account is legally owned by the shareholder rights representative. As the Company does not have legal title of the account, no asset and corresponding liability will be recorded relating to the amounts held in escrow.

Former Ozmo shareholders are eligible to receive a potential earnout in 2013 and 2014 of up to $22.0 million, subject to the achievement of specified revenue targets and, with respect to a portion of the earnout allocable to certain former Ozmo shareholders now employed by the Company, to their continuing employment. The Company recorded a liability in December 2012 of $1.9 million in respect of this potential earnout contingency, representing the fair value of the earnout potential, as adjusted to reflect a probability-weighted forecast for 2013 and 2014 Ozmo revenue and as further discounted by a 17% expected rate of return. As of December 31, 2013, the Company reversed the entire earnout liability through a credit to acquisition-related charges line in the consolidated statements of operations as management revised the estimate of 2014 revenue.

The total purchase price of the acquisition was as follows:



	December 20, 2012
	(in thousands)

Cash in exchange for shareholders' equity interest	$	58,165
Unvested shares in Ozmo	237
Transaction expenses incurred by Ozmo	1,816
Long-term debt paid on behalf of Ozmo	1,415
Fair value of contingent consideration (earn-out provision)	1,927
Liabilities assumed	861
Total purchase price	$	64,421

The purchase price allocation as of the closing date of the acquisition and estimated useful lives of identifiable intangible assets subject to amortization are as follows:



	Purchase Price Allocation			Estimated Useful Lives
	(in thousands)
Total purchase price	$	64,421
Less:
Net tangible assets acquired	(2,805		)
Intangible assets acquired:
Customer relationships	(2,650		)			3 years
Developed technologies	(12,020		)	4	to	6 years
Non-compete agreements, tradename and backlog	(780		)	1	to	3 years
Total intangible assets	(15,450		)
Goodwill	$	46,166

The goodwill recorded, including workforce, in connection with the acquisition, was assigned to the Company’s Microcontroller segment. The goodwill balance of $46.2 million above was reduced by $12.2 million related to net deferred tax assets created as a result of the net operating losses generated by Ozmo in previous periods. Such goodwill is not expected to be deductible for tax purposes. The Company's determination of fair value of tangible and intangible assets acquired was corroborated by a third-party valuation.

The acquisitions referred to in this Note 3 were not material to the Company at the time of acquisition. As a result, pro forma profit and loss statements for the acquired businesses are not presented.