Acquisitions

3 Months Ended

Mar. 31, 2021

2021 Business Combination

On February 26, 2021 (the “Closing Date”), the Company completed the acquisition of Wrangler Topco, LLC (“Wrangler”), the parent entity of Wrike, Inc. (“Wrike”), a leader in the SaaS collaborative work management space, for approximately $2.07 billion (“Purchase Consideration”). The Purchase Consideration consists of a base purchase price of $2.25 billion and is subject to certain adjustments as provided for under the related Agreement and Plan of Merger dated January 16, 2021 (the “Merger Agreement”). The Company expects that the addition of Wrike’s cloud-delivered capabilities will accelerate its business model transition to the cloud and strategy to become a complete SaaS-based work platform. Under the Merger Agreement, the Company acquired all of the issued and outstanding equity securities of Wrangler.

On the Closing Date, $35.0 million of the Purchase Consideration was deposited into a third party escrow fund, to be held for up to one year following the Closing Date, to fund (i) potential payment obligations of Wrangler equityholders with respect to post-closing adjustments to the Purchase Consideration and (ii) potential post-closing indemnification obligations of Wrangler equityholders, in each case in accordance with the terms of the Merger Agreement.

Under the terms of the Merger Agreement, certain unvested stock options held by Wrike employees were assumed by the Company and converted into options to purchase 526,113 shares of the Company's common stock that were valued at $54.3 million using the Black-Scholes option-pricing model. The portion of the fair value of the assumed stock options associated with pre-combination service of Wrike employees was valued at $28.9 million and represented a component of the Purchase Consideration. The remaining fair value of $25.4 million will be recognized as post-combination stock-based compensation expense over the service period. Of these assumed awards, 180,003 options continued with the same monthly vesting conditions under which they were originally granted. The majority of the remaining assumed options were reset to primarily cliff vest on December 31, 2021 or annually over two years. See Note 8 for detailed information on the assumed stock options.

The Merger Agreement contains representations, warranties and covenants believed to be customary for a transaction of this nature, including covenants as to indemnification for breaches of certain representations, warranties and covenants, subject to certain exclusions and caps. The Company has obtained a representation and warranty insurance policy under which it may seek coverage for breaches of certain of Wrangler’s representations, warranties, and covenants in the Merger Agreement.

The Company incurred $18.8 million of expenses related to the Wrike acquisition, of which $15.5 million were expensed during the three months ended March 31, 2021 and are included in General and administrative expense in the accompanying condensed consolidated statements of income.

In February 2021, the Company entered into a three-year term loan credit agreement providing for a $1.00 billion senior unsecured term loan (“2021 Term Loan”) and issued $750.0 million of unsecured senior notes due March 1, 2026 (the “2026 Notes”). The proceeds of the 2021 Term Loan and 2026 Notes were used to (i) fund a portion of the purchase price of the acquisition and (ii) to pay fees and expenses incurred in connection with the acquisition. The Company incurred $9.1 million of issuance costs that were netted against Long-term debt in the accompanying condensed consolidated balance sheets. See Note 11 for detailed information on the debt financing.

The Company has included the effect of the acquisition in its results of operations prospectively from the date of acquisition. Net revenues of Wrike included in the Company’s condensed consolidated statements of income from the Closing Date through March 31, 2021 was $7.9 million. Loss from operations of Wrike included in the Company's condensed consolidated statements of income from the Closing Date through March 31, 2021 was $20.7 million, primarily as a result of amortization of intangible assets acquired and stock based compensation associated with the assumed options and 2021 Inducement Plan. See Note 8 for detailed information on the 2021 Inducement Plan.

Purchase Accounting for Wrike

The purchase price for Wrike was allocated to the acquired net tangible and intangible assets based on estimated fair values as of the date of acquisition. The allocation of the total purchase price is summarized below (in thousands):


	Wrike
	Purchase Price Allocation		Asset Life
Current assets	$	32,008
Intangible assets	$	824,900	2 - 7 years
Goodwill	$	1,656,949	Indefinite
Other assets	$	17,380
Assets acquired	$	2,531,237
Current liabilities assumed	$	84,969
Long-term liabilities assumed	$	202,722
Deferred tax liabilities, non-current	$	176,540
Net assets acquired	$	2,067,006

The fair values of Wrike's intangible assets were determined using the income approach with significant inputs that are not observable in the market. Key assumptions include, but are not limited to, the expected future cash flows, the timing of the expected future cash flows, royalty rates, customer churn, technology obsolescence and the discount rates consistent with the level of risk.

Current assets acquired in connection with the acquisition consisted primarily of cash, accounts receivable and other short term assets. Current liabilities assumed in connection with the acquisition consisted primarily of the current portion of deferred revenues, accounts payable and other accrued expenses, such as transaction expenses. The accrued transaction expenses were paid in full subsequent to the acquisition date. Long-term liabilities assumed in connection with the acquisition consisted of the long-term portion of deferred revenue, other long-term liabilities, and long-term debt, which was paid in full subsequent to the acquisition date. The Company continues to evaluate certain assets and liabilities related to the Wrike acquisition. Additional information, which existed as of the acquisition date but was at that time unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date.

The Company estimated its obligation related to deferred revenue using the cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to supporting the obligation plus an assumed profit. The sum of the costs and assumed profit approximates the amount that the Company would be required to pay a third party to assume the obligation. The estimated costs to fulfill the obligation were based on the near-term projected cost structure for various revenue contracts, resulting in an adjustment to reduce Wrike's carrying value of deferred revenue. The acquired deferred revenue of $33.1 million represents the Company's estimate of the fair value of the contractual obligations assumed based on a preliminary valuation.

The goodwill related to the acquisition is not deductible for tax purposes and is comprised primarily of expected synergies from combining operations and other intangible assets that do not qualify for separate recognition.

Identifiable intangible assets acquired in connection with the Wrike acquisition (in thousands) and the weighted-average lives are as follows:


	Wrike		Asset Life
Core and product technologies	$	347,900	6 years
Customer relationships	$	446,400	7 years
Backlog	$	13,500	2 years
Trade names	$	17,100	3 years
Total	$	824,900

The following unaudited pro-forma information combines the consolidated results of the operations of the Company and Wrike as if the acquisition had occurred on January 1, 2020, the first day of the Company's fiscal year 2020 (in thousands, except per share data):


	Three Months Ended March 31,
	2021		2020
Revenues	$	798,019	$	879,396
Income from operations	$	63,654	$	139,862
Net income	$	62,581	$	123,051
Earnings per share - basic	$	0.51	$	0.99
Earnings per share - diluted	$	0.50	$	0.96