Business Combinations

9 Months Ended

Nov. 30, 2011

Business Combinations [Abstract]

Business Combinations

6. Business Combinations

BridgeCo

On May 19, 2011 SMSC completed the acquisition of BridgeCo, Inc. (“BridgeCo”), a leader in wireless networked audio technologies. BridgeCo's JukeBlox(TM) technology connects tablets, smartphones, PCs, Macs and other consumer electronics products by enabling consumers to access their local or cloud-based music library from any device and from any room in the home. Its JukeBlox software platform, with integrated WiFi® support, enables music streaming to virtually all home audio equipment including home theater systems, A/V receivers, radios, wireless speakers and portable music player docking stations. BridgeCo's technology has been adopted by some of the largest consumer electronics brands in the world including Pioneer, Philips, Denon, Marantz, JBL, B&W and Harmon/Kardon.

As of the date of acquisition, the majority of BridgeCo's assets were located in the United States with certain operations in India and Japan. The functional currency of BridgeCo's operations in the United States is the U.S. dollar (“USD”), in India, the Indian Rupee and in Japan, the Japanese Yen.

SMSC made an initial investment of $41.0 million in cash (net of cash acquired). The terms of the purchase agreement provide for potential earnout payments of up to $5.0 million in 2012 and up to $22.5 million in 2013 to former BridgeCo shareholders, dependent on BridgeCo reaching certain revenue goals in calendar years 2011 and 2012.

In addition, an employee incentive bonus plan was established as part of the merger agreement in which a portion of the earnout payment due to shareholders was apportioned to employees contingent upon continuous future employment as of the specified payout dates established by the plan. This portion of the earnout was not included as part of the contingent consideration liability but is being charged to earnings over the required service period as earned.

The fair value of the contingent consideration at acquisition of $8.8 million was estimated by applying the income approach. That measure was based on significant inputs that are unobservable in the market, and are therefore level 3 inputs. Key assumptions included a discount rate of 19% and a probability-adjusted level of forecasted quarterly revenues.

The following table summarizes the components of the purchase price at fair value (in thousands):
Cash acquired	$	(374	)
Cash consideration paid		41,342
Liability for contingent consideration		8,800
Total consideration	$	49,768
The following table summarizes the allocation of the purchase price at fair value (in thousands):
Receivables	$	601
Inventories		950
Other current assets		629
Property, plant and equipment		442
Customer relationships		1,900
Trade name		70
Technology		7,400
Goodwill (all non-deductible for tax purposes)		40,173
Deferred tax assets		438
Other non current assets		257
Non-interest bearing liabilities		(2,402	)
Deferred tax liabilities		(690	)
Net assets	$	49,768

The results of BridgeCo's operations subsequent to May 19, 2011 have been included in the Company's consolidated results of operations. In the three-month and nine-month periods ended November 30, 2011, BridgeCo contributed $11.6 million and $21.1 million in revenue, respectively.

The following unaudited pro forma financial information presents the combined operating results of SMSC and BridgeCo as if the acquisition had occurred as of the beginning of the comparative prior annual reporting period only. In the three month period ended November 30, 2011 there were no pro forma adjustments as the BridgeCo results were included in the SMSC results for the entire period. Pro forma data is subject to various assumptions and estimates, and is presented for informational purposes only.  This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction been completed as described herein, and the data should not be taken as indicative of future consolidated operating results.

Pro forma financial information is presented in the following table (in thousands):

	Three Months Ended November 30,						Nine Months Ended November 30,
	2011			2010			2011		2010
	(Unaudited)						(Unaudited)
Sales and revenues	$	106,161		$	109,505		$	325,234	$	313,449
Net income (loss)	$	(3,277	)	$	(6,500	)	$	12,513	$	3,704

Symwave

On November 12, 2010 SMSC completed the acquisition of Symwave, Inc. (“Symwave”), a global fabless semiconductor company supplying high-performance analog/mixed-signal connectivity solutions utilizing proprietary technology, IP and silicon design capabilities. Symwave was headquartered in Laguna Niguel, California, with design centers in San Diego, California and Shenzhen, China.  Symwave had approximately 90 employees, of which over 60 were in Asia. The functional currency of Symwave's operations in the United States is the U.S. dollar (“USD”) and in China is the Chinese Yuan Renminbi (“CNY”).

SMSC made an initial $5.2 million equity investment in Symwave in fiscal 2010, resulting in an equity stake of approximately 14% and in fiscal 2011 provided $3.1 million in bridge financing to Symwave. At acquisition, the initial equity investment was revalued to $2.0 million and an impairment loss of $3.2 million was recorded within income from operations. The terms of the purchase agreement provide for quarterly cash payments to former Symwave shareholders upon achievement of certain revenue and gross profit margin goals. As a result, no cash was paid at acquisition and SMSC recorded a $3.1 million liability for contingent consideration. The fair value of the initial equity investment of $2.0 million was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, and are therefore level 3 inputs. Key assumptions include a discount rate of 15% and a probability-adjusted level of quarterly revenues and gross profit margins.

Symwave

The following table summarizes the components of the purchase price at fair value (in thousands):
Fair value of initial investment in Symwave	$	2,030
Assumption of liability for overdue accounts payable		4,062
Assumption of liability for notes payable		3,212
Liability for contingent consideration		3,094
	$	12,398
The following table summarizes the allocation of the purchase price at fair value (in thousands):
Cash and cash equivalents	$	1,517
Inventories		3,441
Accounts receivable		3,338
Other current assets		343
Fixed assets		1,989
Customer relationships		290
Trade name		150
Technology		3,600
Goodwill (all non-deductible for tax purposes)		1,690
Deferred tax assets		1,486
Accounts payable and accrued liabilities		(5,446	)
	$	12,398

The results of Symwave's operations subsequent to November 12, 2010 have been included in the Company's consolidated results of operations. In the three and nine month periods ended November 30, 2011, Symwave contributed $0.4 million and $2.5 million in revenue, respectively.

During the fourth quarter of fiscal 2011 the Company initiated a plan to reduce costs and investments, including reducing investment in the former Symwave business (see Note 13 - Restructuring).  

The following unaudited pro forma financial information presents the combined operating results of SMSC and Symwave as if the acquisition had occurred as of the beginning of the comparable prior annual reporting period only.  In the three and nine month periods ended November 30, 2011 there were no pro forma adjustments as the Symwave results were included in the SMSC results for the entire period. Pro forma data is subject to various assumptions and estimates, and is presented for informational purposes only.  This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction been completed as described herein, and the data should not be taken as indicative of future consolidated operating results.

Pro forma financial information is presented in the following table (in thousands):

	Three Months Ended November 30,						Nine Months Ended November 30,
	2011			2010			2011		2010
	(Unaudited)						(Unaudited)
Sales and revenues	$	106,161		$	112,414		$	322,237	$	316,374
Net income	$	(3,277	)	$	(7,538	)	$	14,792	$	435