ACQUISITIONS

On July 14, 2015 (Closing Date), the Company completed the acquisition of the Communications Business, which included certain assets, liabilities, technology and employees within Tektronix Communications, VSS Monitoring, Arbor Networks and certain portions of the Fluke Networks Enterprise business, which excluded Danaher's data communications cable installation business and its communication service provider business. The acquisition was structured as a Reverse Morris Trust transaction (the Transaction) whereby Danaher Corporation contributed its Communications Business to a new subsidiary, Potomac Holding LLC (Newco). The total equity consideration was $2.3 billion based on issuing approximately 62.5 million new shares of NetScout common stock to the existing common unit holders of Potomac Holding LLC (Newco), based on the July 13, 2015 NetScout common stock closing share price of $36.89 per share.

The Transaction is being accounted for under the acquisition method of accounting with the operations of the Communications Business included in the Company’s operating results from the date of acquisition. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The preliminary determination of the fair value of assets acquired and liabilities assumed has been recognized based on management's estimates and assumptions using the information about facts and circumstances that existed at the acquisition date.

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value the assets acquired and liabilities assumed on the acquisition date, its estimates and assumptions are subject to refinement. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations. The finalization of the purchase accounting assessment will result in a change in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill to reflect additional information received about facts and circumstances which existed at the date of acquisition. The Company records adjustments to the assets acquired and liabilities assumed subsequent to the purchase price allocation period in the Company’s operating results in the period in which the adjustments were determined. The size and breadth of the Transaction will necessitate the use of this measurement period to adequately analyze and assess a number of the factors used in establishing the fair value of certain tangible and intangible assets acquired and liabilities assumed as of the acquisition date and the related tax impacts of any changes made. Any potential adjustments made could be material in relation to the preliminary values presented below. In connection with the Transaction, under the Employee Matters Agreement dated July 14, 2015 by and among the Company, Danaher and Newco, Danaher will fund certain contracts under which employees will provide post-combination services to the Company.

For any outstanding Danaher restricted stock units or stock options held by employees of the Communications Business transferred to Newco (Newco Employees) that vested from July 14, 2015 through August 4, 2015, the awards continued to vest in Danaher shares. These awards met the definition of a derivative under ASC 815 and as such, the Company determined the fair value of these awards on July 14, 2015 and recorded them separate from the business combination as prepaid compensation. The derivative was amortized into compensation expense through August 4, 2015, the post combination requisite settlement date. The total amount of compensation expense for post combination services recorded for the three and six months ended September 30, 2015 was $6.5 million.

All outstanding Danaher restricted stock units or stock options held by Newco Employees that were due to vest after August 4, 2015 were cancelled and replaced by NetScout with a cash retention award equal to one half of the value of the employee’s cancelled Danaher equity award and up to $15 million of restricted stock units relating to shares of NetScout common stock equal to the remaining one half of the value of the employee’s cancelled Danaher equity award. The restricted stock units issued are considered new share-based payment awards granted by NetScout to the former employees of Danaher. NetScout accounted for these new awards separately from the business combination. The Company recognized share-based compensation net of an estimated forfeiture rate and only recognized compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award. The cash retention award will become payable on the August 4, 2016, subject to the employee’s continued employment with NetScout through the applicable vesting date of August 4, 2016. Danaher will reimburse NetScout for the amount of the cash retention payments (net of any applicable employment taxes and deductions). The cash retention award liability will be accounted for separately from the business combination as the cash retention award is automatically forfeited upon termination of employment. NetScout will record the cash retention award liability over the period it is earned as compensation expense for post combination services. The reimbursement by Danaher to NetScout of the estimated cash retention award payment represents contingently returnable consideration, which will be accounted for separately from the business combination on the date of the acquisition. At September 30, 2015, the Company has recorded a receivable from Danaher in the amount of $8.4 million, net of tax and is included as prepaid expenses and other current assets in Company’s consolidated balance sheet. At September 30, 2015, the Company has recorded a cash retention award liability of $2.6 million and is included as accrued compensation in Company’s consolidated balance sheet. For the three and six months ended September 30, 2015, $2.6 million has been recorded as compensation expense for post combination services.

Newco Employees that were entitled to receive an incentive bonus under the Danaher annual bonus plan will receive a cash incentive bonus payment subject to the employee’s continued employment with NetScout through December 31, 2015. The cash incentive bonus liability will be accounted for separately from the business combination as the cash incentive bonus is automatically forfeited upon termination of employment. NetScout will record the liability over the period it is earned as compensation expense for post combination services. The payment of the cash retention award will be reimbursed by Danaher to NetScout, which will be accounted for separately from the business combination on the date of the acquisition. At September 30, 2015, the Company has recorded a receivable due from Danaher in the amount of $5.8 million, net of tax and is included as prepaid expenses and other current assets in Company’s consolidated balance sheet. At September 30, 2015, the Company has recorded a cash incentive bonus liability of $4.1 million and is included as accrued compensation in the Company’s consolidated balance sheet. For the three and six months ended September 30, 2015, $4.1 million has been recorded as compensation expense for post combination services.

Certain Newco Employees will receive cash retention payments subject to the employee’s continued employment with NetScout through October 16, 2015, ninety (90) days after the close of the acquisition. The cash retention payment liability will be accounted for separately from the business combination as the cash retention payment is automatically forfeited upon termination of employment. NetScout will record the liability over the period it is earned as compensation expense for post combination services. The payment of the cash retention award will be reimbursed by Danaher to NetScout, which will be accounted for separately from the business combination on the date of the acquisition. At September 30, 2015, the Company has recorded a receivable due from Danaher in the amount of $5.0 million, net of tax and is included as prepaid expenses and other current assets in Company’s consolidated balance sheet. At September 30, 2015, the Company has recorded a cash retention payment liability of $6.7 million and is included as accrued compensation in Company’s consolidated balance sheet. For the three and six months ended September 30, 2015, $6.7 million has been recorded as compensation expense for post combination services.

The following table summarizes the allocation of the purchase price (in thousands):



Purchase Price allocation:
Total equity consideration	$	2,305,611		(1)
Less: Equity consideration for replacement awards	(25,701		)	(2)
Less: Delayed close entities	(5,700		)	(3)
Estimated Purchase Price	2,274,210

Estimated fair value of assets acquired and liabilities assumed:
Cash	27,748
Accounts receivable	135,322
Inventories	80,320
Prepaid expenses and other assets	7,220
Property, plant and equipment	36,539
Deferred income taxes	13,067
Intangible assets	1,080,700
Other assets	897
Accounts payable	(21,819		)
Accrued compensation	(27,861		)
Accrued other	(13,977		)
Deferred revenue	(198,265		)
Other long-term liabilities	(3,572		)
Accrued retirement benefits	(26,758		)
Deferred tax liabilities	(319,612		)
Goodwill	$	1,504,261



	(1)	Represents approximately 62.5 million new shares (plus cash in lieu of fractional shares) of NetScout common stock issued to the existing common unit holders of Newco based on the July 13, 2015 NetScout common stock closing share price of $36.89 per share.



	(2)	Represents the value of certain outstanding Danaher equity awards held by Newco Employees for which continuing employees will receive value after the Closing Date. A portion of this amount relates to awards that will continue to vest in Danaher shares after the Closing Date. These future compensation amounts will be settled in shares other than shares of the acquired business. The balance of this amount also represents future compensation expense and relates to a cash award to be paid by NetScout to acquired Newco employees on August 4, 2016. The cash payment by NetScout will be reimbursed by Danaher. These items are further described in the Employee Matters Agreement dated July 14, 2015 by and among NetScout Systems, Inc., Danaher Corporation and Potomac Holding LLC and have been accounted for separately from the Communications Business Acquisition.



	(3)	Represents the fair value attributable to the foreign entities that the Company did not obtain control over on July 14, 2015 due to regulatory and other compliance requirements. The Company expects to gain control over these entities in the next twelve months.

The Transaction is expected to extend the Company's reach into growth-oriented adjacent markets, including cyber security, with a broader range of market-leading products and capabilities, strengthen the Company's go-to-market resources to better support a larger, more diverse and more global customer base, and increase scale and elevate the Company's strategic position within key accounts. Goodwill was recognized for the excess purchase price over the fair value of the assets acquired. Goodwill of $1.5 billion from the acquisition will be included within the following operating segments: $534.7 million in Arbor Networks, $792.9 million in Tektronix Communications, $57.0 million in VSS, and $119.7 million in FNET. All reporting units resulting from the Transaction will be included in the Company’s annual goodwill impairment review.

Goodwill and intangible assets recorded as part of the acquisition are not deductible for tax purposes.

The fair values of intangible assets were based on valuations using an income approach. These assumptions include estimates of future revenues associated with the technology purchased as part of the acquisition and the migration of the current technology to more advanced version of the software. This fair value measurement was based on significant inputs not observable in the market and thus represents Level 3 fair value measurements. The following table reflects the fair value of the acquired identifiable intangible assets and related estimates of useful lives (in thousands):



	Fair Value		Useful Life (Years)
Developed technology	$	221,900	9 - 13
Customer relationships	794,100		13 - 18
Backlog	18,200		1 - 3
Definite lived trademark and tradenames	43,900		3 - 9
Leasehold interest	2,600		4 - 6
	$	1,080,700

The weighted average useful life of identifiable intangible assets acquired in the transaction is 14.7 years. Developed technology is amortized using an accelerated amortization method and has a weighted average useful life of 11.7 years. Customer relationships are amortized using an accelerated amortization method and have a weighted average useful life of 16.3 years. Backlog is amortized using an accelerated amortization method and has a weighted average useful life of 2.0 years. Trademarks and tradenames are amortized using an accelerated amortization method and has a weighted average useful life of 8.5 years. Leasehold interests are amortized on a straight-line basis and has a weighted average useful life of 5.6 years.

The Company incurred approximately $17.9 million of acquisition-related costs related to the transaction which are included in general and administrative expense during the six months ended September 30, 2015.

During the six months ended September 30, 2015, the Company has recorded $168.8 million of revenue and a net loss of $19.5 million directly attributable to the Transaction within its consolidated financial statements.

The following table presents unaudited pro forma results of the historical Consolidated Statements of Operations of the Company and the Communications Business of Danaher for the three and six months ended September 30, 2015 and 2014, giving effect to the mergers as if they occurred on April 1, 2014 (in thousands, except per share data):



	Three Months Ended September 30, (unaudited)								Six Months Ended September 30, (unaudited)
	2015				2014				2015				2014
Pro forma revenue		$	267,754			$	268,897			$	538,060		$	559,009
Pro forma net income (loss)		$	(11,773	)		$	(18,019	)		$	(30,683	)	$	(21,969	)
Pro forma income (loss) per share:
Basic		$	(0.12	)		$	(0.17	)		$	(0.30	)	$	(0.21	)
Diluted		$	(0.12	)		$	(0.17	)		$	(0.30	)	$	(0.21	)
Pro forma shares outstanding
Basic		100,242				103,560				101,750			103,570
Diluted		100,242				103,560				101,750			103,570

The pro forma results for the three and six months ended September 30, 2015 and 2014 primarily include adjustments for amortization of intangibles. This pro forma information does not purport to indicate the results that would have actually been obtained had the acquisitions been completed on the assumed date, or which may be realized in the future.