Business Combinations

6 Months Ended

Apr. 30, 2014

Business Combinations

Note 3. Business Combinations

During the second quarter of fiscal 2014, the Company made several acquisitions that were accounted for as business combinations. The Company does not consider these acquisitions to be material, individually or in the aggregate, to the Company’s balance sheet and results of operations. The consolidated financial statements include the operating results of each acquired business from the respective date of acquisition.

Acquisition of Coverity, Inc. (Coverity)

On March 24, 2014, the Company acquired Coverity, the leading provider of software quality, testing and security tools, for $375.5 million in cash, payable to holders of Coverity capital stock and vested stock options. Additionally, the Company assumed outstanding unvested Coverity stock options. The Company believes this acquisition has enabled it to enter into a new, growing market dedicated to helping companies deliver better software faster, by finding software code defects as the code is being developed rather than at the end of the process. Coverity’s customer base includes Synopsys’ semiconductor and systems companies, albeit different users and budgets, and extends well beyond to software developers such as independent software vendors and any company engaging in e-commerce.

The total purchase consideration and the preliminary purchase price allocation were as follows:

	(in thousands)
Total consideration	$	375,500
Goodwill		266,423
Identifiable intangibles assets acquired		101,900
Other tangible assets acquired, net		28,447
Deferred revenue		(21,270	)
Total purchase allocation	$	375,500

As of the end of the second quarter of fiscal 2014, the Company’s purchase price allocation is preliminary and has not been finalized. The acquired gross deferred revenue amount of $68.5 million was recorded at fair value of $21.3 million as required by accounting rules. Goodwill of $266.4 million, which is not deductible for tax purposes, primarily resulted from the Company’s assembled workforce and expectation of sales growth due to its entrance into a new market and its new technology offerings. Acquired identifiable intangible assets of $101.9 million, consisting of technology, customer relationships, in-process R&D, backlog and trademarks, were valued using the income method, and are being amortized over two to eight years.

Acquisition-related costs directly attributable to the business combination of $3.0 million and $3.5 million for the three and six month periods ended April 30, 2014, respectively, were expensed as incurred in the condensed unaudited consolidated statements of operations and consist primarily of professional services and personnel-related costs.

The fair value of stock options assumed was approximately $15.0 million using the Black-Scholes option-pricing model and will be expensed over their remaining service periods on a straight-line basis.

Other Fiscal 2014 Acquisitions

During the second quarter of fiscal 2014, the Company acquired two other companies for cash and preliminarily allocated the total purchase consideration of $34.3 million to the assets acquired and liabilities assumed based on their respective fair values at the acquisition dates, resulting in total goodwill of $19.9 million, which is not deductible for tax purposes. Acquired identifiable intangible assets totaling $20.7 million were valued using the income or cost methods and are being amortized over their respective useful lives ranging from two to eight years. For the three and six month periods ended April 30, 2014, acquisition-related costs totaling $ 1.1 million and $1.6 million, respectively, were expensed as incurred in the condensed unaudited consolidated statement of operations.

The preliminary fair value estimates for the assets acquired and liabilities assumed for these acquisitions are not yet finalized and may change as additional information becomes available during the respective measurement periods. The primary areas of those preliminary estimates that have not yet been finalized relate to certain tangible assets and liabilities, identifiable intangible assets, and taxes. Additional information, which existed as of the acquisition date but is yet 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. Changes to amounts recorded as assets or liabilities will be recorded as retrospective adjustments to the provisional amounts recognized as of the acquisition date and may result in a corresponding adjustment to goodwill.