NOTE 3—Business Combinations
Acquisition of ManageIQ, Inc.
On December 21, 2012, the Company completed its acquisition of ManageIQ, Inc. (“ManageIQ”), a provider of enterprise cloud management and automation solutions that enable organizations to deploy, manage and optimize private clouds, public clouds and virtualized infrastuctures. Under the terms of the purchase agreement, the consideration transferred by the Company totaled $104.5 million. The Company incurred approximately $0.5 million in transaction costs including legal and accounting fees relating to the acquisition. These costs have been expensed as incurred and included in general and administrative expense on the Consolidated Statement of Operations for the year ended February 28, 2013.
The table below represents the tangible and identifiable intangible assets and liabilities (in thousands) based on management’s preliminary assessment of the acquisition date fair value of the assets acquired and liabilities assumed:
| Total Consideration Allocated |
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Estimated identifiable intangible assets (see detail below) |
$ | 17,340 | ||
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Cash |
222 | |||
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Accounts receivable |
570 | |||
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Fixed assets |
69 | |||
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Deferred tax assets, net |
3,446 | |||
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Other assets |
155 | |||
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Accrued liabilities |
(262 | ) | ||
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Deferred revenue |
(132 | ) | ||
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Goodwill |
83,074 | |||
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Total consideration allocated |
$ | 104,482 | ||
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The following table summarizes the allocation of identifiable intangible assets resulting from the acquisition. For purposes of this allocation, the Company has assessed a fair value of ManageIQ’s identifiable intangible assets related to developed technology, employee covenants not to compete, customer relationships and tradenames and trademarks based on the net present value of the projected income stream of these identifiable intangible assets. The fair value of the identifiable intangible assets is being amortized over the estimated useful life of each intangible asset on a straight-line basis which approximates the economic pattern of benefits (in thousands):
| Amortization Expense Type | Estimated
Life (Years) |
Total | ||||||||||
|
Developed technology |
Cost of revenue | 5 | $ | 13,500 | ||||||||
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Employee covenants not to compete |
Research and development | 4 | 2,800 | |||||||||
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Customer relationships |
Sales and marketing | 5 | 1,000 | |||||||||
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Tradenames and trademarks |
General and administrative | 2 | 40 | |||||||||
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Total identifiable intangible assets |
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$ | 17,340 | |||||||||
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Other acquisitions in fiscal 2013
During the year ended February 28, 2013, the Company entered into agreements to acquire two businesses operating in the middleware space. These acquisitions include technologies that are complementary to the Company’s JBoss Middleware technology. One acquisition, which included certain assets and related operations acquired from Polymita Technologies S.L. (“Polymita”), closed on August 28, 2012. The second acquisition closed on September 7, 2012 and included certain assets and related operations acquired from FuseSource, a division of Progress Software Corporation (“FuseSource”). The total cash consideration for these two acquisitions was $31.2 million. The total cash consideration transferred of $31.2 million has been allocated to the Company’s assets as follows: $17.5 million to goodwill, $13.2 million to identifiable intangible assets and the remaining $0.5 million to other current assets.
Transaction fees related to these two acquisitions totaled approximately $1.0 million for the year ended February 28, 2013 and are included in general and administrative expense on the Company’s Consolidated Statement of Operations for the year ended February 28, 2013.
Acquisition of Gluster, Inc.
On October 7, 2011, the Company completed its acquisition of all issued and outstanding shares of Gluster, Inc. (“Gluster”), a provider of scale-out, open source storage solutions. The acquisition was intended to expand the Company’s enterprise software offerings to include management of unstructured data. Under the terms of the purchase agreement, the consideration transferred by the Company totaled $137.2 million. The Company incurred approximately $0.5 million in transaction costs including legal and accounting fees relating to the acquisition. These costs have been expensed as incurred and included in general and administrative expense on the Consolidated Statement of Operations for the year ended February 29, 2012.
The total consideration transferred by the Company in connection with the acquisition is summarized in the following table (in thousands):
| Total Consideration Transferred |
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Cash consideration paid to and/or on behalf of holders of Gluster stock and vested options |
$ | 135,906 | ||
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Fair value of unvested employee share-based awards assumed and attributed to pre-combination services (1) |
1,244 | |||
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Total |
$ | 137,150 | ||
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| (1) | The total fair value, as of October 7, 2011, of all assumed nonvested share-based awards was $14.5 million, of which $1.2 million has been attributed to pre-acquisition employee services and accordingly has been recognized as consideration transferred. The remaining $13.3 million of fair value will be recognized as compensation expense over the remaining vesting period. |
The table below represents the tangible and identifiable intangible assets and liabilities (in thousands) based on management’s assessment of the acquisition date fair value of the assets acquired and liabilities assumed:
| Total Consideration Allocated |
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|
Identifiable intangible assets (see detail below) |
$ | 6,800 | ||
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Cash |
696 | |||
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Accounts receivable |
321 | |||
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Fixed assets |
454 | |||
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Deferred tax assets, net |
3,263 | |||
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Other assets |
1,093 | |||
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Accrued liabilities |
(1,872 | ) | ||
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Deferred revenue |
(321 | ) | ||
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Goodwill |
126,716 | |||
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Total consideration allocated |
$ | 137,150 | ||
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The following table summarizes the allocation of identifiable intangible assets resulting from the acquisition. For purposes of this allocation, the Company has assessed a fair value of Gluster identifiable intangible assets related to customer relationships and tradenames and trademarks based on the net present value of the projected income stream of these identifiable intangible assets. The fair value of the identifiable intangible assets is being amortized over the estimated useful life of each intangible asset on a straight-line basis which approximates the economic pattern of benefits (in thousands):
| Amortization Expense Type | Estimated
Life (Years) |
Total | ||||||||||
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Customer relationships |
Sales and marketing | 5 | $ | 6,200 | ||||||||
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Tradenames and trademarks |
General and administrative | Indefinite | 600 | |||||||||
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Total identifiable intangible assets |
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$ | 6,800 | |||||||||
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Other acquisitions in fiscal 2011
On November 19, 2010, the Company acquired Makara, Inc. (“Makara”), a developer of deployment and management solutions for applications in the cloud. The acquisition of Makara was intended to accelerate the development of the Company’s Platform-as-a-Service solution. The Company acquired Makara for cash consideration of $31.4 million, net of $0.6 million of cash acquired. The net cash consideration transferred of $31.4 million has been allocated to the Company’s assets as follows: $26.1 million to goodwill, $5.0 million to identifiable intangible assets and the remaining $0.3 million to current assets.
Pro forma consolidated financial information
The following unaudited pro forma consolidated financial information reflects the results of operations of the Company for the years ended February 28, 2013 and February 29, 2012 (in thousands, except per share amounts) as if the acquisitions of Gluster, Polymita, FuseSource and ManageIQ had closed on March 1, 2011, after giving effect to certain purchase accounting adjustments. These pro forma results are not necessarily indicative of what the Company’s operating results would have been had the acquisitions actually taken place at the beginning of the period.
| Year ended February 28, 2013 (unaudited) |
Year ended February 29, 2012 (unaudited) |
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Revenue |
$ | 1,329,780 | $ | 1,134,679 | ||||
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Net income and diluted net income |
136,459 | 125,387 | ||||||
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Basic net income per common share |
$ | 0.71 | $ | 0.65 | ||||
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Diluted net income per common share |
$ | 0.70 | $ | 0.64 | ||||
Post-acquisition financial information
The following is a summary of revenue, operating expenses and operating loss for Polymita, FuseSource and ManageIQ that are included in the Company’s Consolidated Statement of Operations for the year ended February 28, 2013 (in thousands):
| Year ended February 28, 2013 |
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Revenue |
$ | 1,976 | ||
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Operating expenses |
(10,735 | ) | ||
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Operating loss |
(8,759 | ) | ||
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Related party matters
Dr. Naren Gupta, a director of Red Hat since 2005, was a director of Gluster and is the Managing Director of Nexus Venture Partners (“Nexus”), a venture capital fund that was a principal investor in Gluster. Nexus held approximately 36.4% percent of the shares of Gluster capital stock and vested options outstanding on the closing date.
Dr. Gupta did not attend the meeting at which Red Hat’s Board of Directors (the “Board”) approved the transaction and recused himself from all Board deliberations with respect to the transaction. The purchase price in the transaction was determined through arm’s-length negotiations between Red Hat and Gluster.
Goodwill and other business combinations
The Company completed its annual goodwill impairment test in February 2013. No goodwill impairment was deemed to have occurred. The following is a summary of goodwill for the years ended February 28, 2013, February 29, 2012 and February 28, 2011 (in thousands):
|
Balance at February 28, 2010 |
$ | 438,749 | ||
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Add: acquisition of Makara |
24,681 | |||
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Impact of foreign currency fluctuations |
243 | |||
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Balance at February 28, 2011 |
$ | 463,673 | ||
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Add: acquisition of Gluster |
126,716 | |||
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Add: adjustment to Makara purchase price for finalization of allocation |
1,458 | |||
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Impact of foreign currency fluctuations |
(284 | ) | ||
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Balance at February 29, 2012 |
$ | 591,563 | ||
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Add: acquisition of ManageIQ |
83,074 | |||
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Add: other acquisitions |
17,462 | |||
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Impact of foreign currency fluctuations and other adjustments |
(1,188 | ) | ||
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Balance at February 28, 2013 |
$ | 690,911 | ||
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