Acquisition

6 Months Ended

Jun. 30, 2011

Acquisition

Acquisition

2. Acquisition

        The acquisition of LaBranche & Co Inc. ("LaBranche") by the Company was consummated pursuant to the terms of the Agreement and Plan of Merger ("Merger Agreement"), dated as of February 16, 2011, after the market close on June 28, 2011. LaBranche Capital, LLC (LCAP), which was renamed "Cowen Capital LLC" following consummation of the acquisition, was a wholly owned subsidiary of LaBranche and is now a wholly-owned subsidiary of the Company, is a registered broker-dealer and Financial Industry Regulatory Authority ("FINRA") member firm that operates as a market-maker in Exchange Traded Funds ("ETFs"), engages in hedging activities in options, ETFs, structured notes, foreign currency securities and futures related to its market-making operations and also conducts principal trading activities in these securities. Prior to the acquisition, LaBranche discontinued certain operations in its market-making segment, including upstairs options market-making on various exchanges and electronic market-making in the International Securities Exchange. As of the close of market on June 28, 2011, LaBranche stock was delisted and no longer trades on the New York Stock Exchange.

        Under the terms of the Merger Agreement, each outstanding share of LaBranche was converted into 0.9980 shares of Cowen Class A common stock (the "Exchange Ratio"). The consideration received by LaBranche's shareholders was valued at approximately $156 million in the aggregate, based on the closing price of Cowen Class A common stock on the NASDAQ Global Select Market of $3.82 on June 28, 2011. This is based on 40,931,997 shares of LaBranche stock that were outstanding on the date of the completion of the acquisition.

        The acquisition was accounted for under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). In this case, the acquisition was accounted for as an acquisition by Cowen of LaBranche. As such, results of operations for LaBranche are included in the accompanying condensed consolidated statements of operations since the date of acquisition, and the assets acquired and liabilities assumed were recorded at their estimated fair values. The fair value of Cowen shares issued to LaBranche shareholders was the purchase consideration for the acquisition. Based on the June 28, 2011 preliminary purchase price allocation, the fair value of the net identifiable assets acquired and liabilities assumed amounted to $175.9 million, (excluding $2.3 million non-compete agreements acquired) exceeding the fair value of the preliminary purchase price of $156 million. As a result, the Company recognized a preliminary, nonrecurring bargain purchase gain of approximately $22.2 million in the second quarter of 2011, which is included in other income in the condensed consolidated statements of operations for the three and six month periods ended June 30, 2011. The Company's share price has traded below its book value for a substantial part of the last 52 weeks, and as the preliminary purchase consideration (the Exchange Ratio) was determined based on the stock price of Cowen on June 28, 2011, the purchase price allocation based on the fair value of LaBranche's net assets at acquisition date reflected in these condensed consolidated financial statements has resulted in a bargain purchase gain.

        The Company is currently in the process of finalizing the valuation for certain acquired assets of LaBranche; therefore, the fair value measurements at June 28, 2011 and the gain on acquisition of business are preliminary and subject to further adjustment. The allocation of the purchase price to the net assets acquired will be finalized as necessary, up to one year after the acquisition closing date, as information becomes available. The following table summarizes the preliminary purchase price allocation of net tangible and intangible assets acquired as of June 28, 2011:

		(dollars in thousands)
	Cash and cash equivalents	$	117,496
	Cash collateral pledged		1,127
	Securities owned, at fair value		221,855
	Other investments		2,569
	Receivable from brokers		93,754
	Fixed assets, net		8,804
	Intangibles		3,010
	Other assets		4,897
	Securities sold, not yet purchased, at fair value		(175,391	)
	Payable to brokers		(81,536	)
	Compensation payable		(3,521	)
	Fees payable		(969	)
	Unfavorable lease		(3,388	)
	Accounts payable, accrued expenses and other liabilities		(12,725	)
Total net assets acquired		$	175,982
	Non-compete agreements acquired		2,310
	Goodwill/(Bargain purchase gain) on transaction		(22,244	)(1)
Total purchase price		$	156,048

(1)

Represents the preliminary bargain purchase gain on the acquisition.

        The Company believes that all of the acquired receivables and contractual amounts receivable as reflected above in the preliminary allocation of the purchase price are recorded at fair value and are expected to be collected in full.

        The Company recognized approximately $0.6 million and $2.3 million of acquisition-related costs, including legal, accounting, and valuation services for the three months and six months ended June 30, 2011, respectively. These costs are included in professional, advisory and other fees and other expenses in the condensed consolidated statements of operations.

        As of June 30, 2011, the estimated fair value of the Company's intangibles, as acquired through the acquisition, is $3 million. In addition, non-compete agreements for the amount of $2.3 million, were negotiated as part of the acquisition, which have been recognized separately from the acquisition of assets and liabilities assumed in accordance U.S. GAAP. The total non-compete agreements acquired of $2.5 million, have been included within Intangible assets, net in the condensed consolidation statements of financial condition. The allocation of the intangibles is as follows:

		Estimated Intangible Assets Acquired		Estimated average remaining useful lives
		(in thousands)		(years)
Intangible asset class
Exchange memberships		$	240	indefinite
Covenants to not compete			1,950	1 or 2
Covenants with limiting conditions			580	10
Intellectual property			2,550	3
	Total intangible assets	$	5,320

        Amortization expense for the three and six months ended June 30, 2011, respectively, is immaterial. The estimated amortization expense related to these intangible assets in future years is as follows:

	(dollars in thousands)
2011	$	997
2012		1,883
2013		1,341
2014		483
2015		58
Thereafter		318
	$	5,080

        Included in the accompanying condensed consolidated statements of operations for the three months and six months ended June 30, 2011 are revenues of $0.2 million and a net income of $0.2 million related to LaBranche's results of operations for the period from June 29, 2011 through June 30, 2011.

        The following unaudited supplemental pro forma information presents condensed consolidated financial results for the six month periods as if the acquisition was completed as of January 1, 2010. This supplemental pro forma information has been prepared for comparative purposes only and is not intended to be indicative of what the Company's results would have been had the acquisition been completed on January 1, 2010, nor does it purport to be indicative of any future results.

		For the six months ended June 30,
		2011		2010
		(in thousands)
Revenues		$	124,245	$	111,986
Net Income			1,129		(56,929	)
Net Income per common share
	Basic		0.01		(0.50	)
	Diluted		0.01		(0.50	)