Acquisition

LaBranche & Co Inc.

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. LCAP is a registered broker-dealer and Financial Industry Regulatory Authority ("FINRA") member firm that operates as a market-maker in ETFs, engages in hedging activities in options, exchange traded funds ("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 generally accepted accounting principles 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 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 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 and covenants with limiting conditions acquired), exceeding the fair value of the purchase price of $156 million. As a result, the Company recognized a nonrecurring bargain purchase gain of approximately $22.2 million in the second quarter of 2011, which is included in other income in the consolidated statements of operations for the twelve months ended December 31, 2011. The Company's share price has traded below its book value for a substantial part of the last 52 weeks, and as the 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 consolidated financial statements has resulted in a bargain purchase gain.

The following table summarizes the 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	2,770
Other assets	5,137
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 and covenants with limiting conditions acquired	2,310
Goodwill/(Bargain purchase gain) on transaction	(22,244		)
Total purchase price	$	156,048

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

The Company recognized approximately $3.3 million of acquisition-related costs, including legal, accounting, and valuation services for the twelve months ended December 31, 2011. These costs are included in professional, advisory and other fees and other expenses in the consolidated statements of operations.

As of the acquisition date, the estimated fair value of the Company's intangibles, as acquired through the acquisition, was $2.8 million. In addition, non-compete agreements and covenants with limiting conditions 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 with US GAAP. The total non-compete agreements and covenants with limiting conditions acquired of $2.5 million have been included within intangible assets, net in the consolidated statements of financial condition. The allocation of the intangibles' amortization expense for the twelve months ended December 31, 2011 and estimated amortization expense in future years are shown in Note 10 "Goodwill and Intangible Assets".

As discussed in Note 4, the subsidiaries acquired through the LaBranche acquisition were discontinued. As a result, no unaudited supplemental proforma information is presented.

Cowen Group Inc.

On November 2, 2009, the transactions contemplated by the Transaction Agreement (the “Transactions”), were consummated including (1) the merger of Lexington Merger Corp. with and into Cowen Holdings, pursuant to which each outstanding share of common stock of Cowen Holdings was converted into one share of Class A common stock of the Company and (2) the transfer by RCG (which prior to the consummation of the Transactions operated the Ramius business) of substantially all of its assets and liabilities to Park Exchange LLC in exchange for the Company's issuance to RCG of 37,536,826 shares of Class A common stock of the Company. Following the consummation of the Transactions, each of Park Exchange LLC and Cowen Holdings became wholly owned subsidiaries of the Company, and Park Exchange LLC was renamed Ramius LLC.

The Transactions were accounted for under the acquisition method in accordance with US GAAP. Accordingly, the Transactions were accounted for as an acquisition by Ramius of Cowen Holdings. As such, results of operations for Cowen Holdings are included in the accompanying consolidated statements of operations since the date of acquisition, and the assets acquired and liabilities assumed were recorded at their fair value as at the acquisition date.

Under the terms of the Transaction Agreement, each outstanding share of common stock of Cowen Holdings was converted into a share of the Class A common stock of the Company. The consideration received by Cowen Holdings's shareholders was valued at $7.55 per share, or approximately $114.5 million in the aggregate, based on the closing stock price of Cowen Holdings on October 30, 2009. This is based on the 14,883,968 shares of Cowen Holdings stock that were outstanding at the date of the completion of the Transactions, including 12,071,646 freely tradable shares, 2,784,816 restricted shares and 27,506 shares underlying vested restricted stock units at the acquisition date. The number of shares used to estimate the purchase consideration excludes 185,828 restricted shares at the acquisition date that did not vest as part of the Transactions and were not effectively purchased. Restricted shares, restricted share units and stock options of Cowen Holdings common stock at the acquisition date were converted into an equivalent number of restricted shares, restricted share units and stock options of the Company's Class A common stock.

The Company acquired Cowen Holdings due to its experienced teams and complementary strengths that will enable the combined company to take advantage of a wide variety of corporate finance and investment opportunities.

The estimated fair value of the Company's Class A common stock issued to Cowen Holdings stockholders represents the purchase consideration in the Transactions, which was computed as follows:



	(in thousands, except per share data)
Number of Cowen Holdings common shares outstanding at closing:
Common float	12,072		(1)
Restricted shares	2,785		(2)
Restricted share units	27		(3)
Total shares issued to Cowen Holdings stockholders	14,884
Estimated market price a Cowen Holdings common share	$	7.55	(4)
Estimated purchase price of Cowen Holdings common shares	$	112,374
Add: Fair value of unvested restricted shares and options issued	2,123		(5)
Estimated purchase price	$	114,497


(1)	Based on the trading float of Cowen Holdings's common shares on the acquisition date.


(2)	Based on Cowen Holdings's unvested restricted shares outstanding on the acquisition date. Excludes restricted shares that were not subject to accelerated vesting as a result of the Transactions.


(3)	Based on Cowen Holdings's restricted share units outstanding on the acquisition date.


(4)	The $7.55 share price used in calculating the estimated purchase consideration represents the closing share price of Cowen Holdings common stock on October 30, 2009.

(5)

In connection with the Transactions, each outstanding Cowen Holdings stock option was exchanged for one stock option of the Company. Each newly issued stock option was fully vested upon issuance, and has a strike price and expiration date equal to that of the original stock option. Cowen Holdings had 892,782 stock options outstanding as of the closing date. The fair value of Cowen Holdings's stock option awards was estimated to be $0.7 million based on a Black‑Scholes valuation model. Also included in the $2.1 million is $1.4 million related to the fair value of pre-combination service on restricted shares that were not subject to accelerated vesting as a result of the Transactions.

The table below summarizes the fair value of identifiable assets acquired and liabilities assumed at the acquisition date as well as the acquisition date fair value of the non-controlling interest in Cowen Holdings that was acquired:



	(dollars in thousands)
Cash and cash equivalents	$	97,903
Cash collateral pledged	501
Securities owned, at fair value	17,555
Receivable from brokers	19,893
Fees receivable	4,802
Other investments	17,121
Due from related parties	1,061
Fixed assets, net	8,379
Intangible assets, net	17,000
Other assets	17,535
Securities sold, not yet purchased, at fair value	(12,832		)
Payable to brokers	(1,304		)
Compensation payable	(37,592		)
Accounts payable, accrued expenses and other liabilities	(40,952		)
Total identifiable net assets acquired	109,070
Non-controlling interest	(1,724		)
Goodwill	7,151
Total purchase price	$	114,497

The amount of the acquired receivables and contractual amounts receivable as reflected above are shown net of approximately $0.4 million of receivables which were expected to be uncollectible.

The non-controlling interest in Cowen Holdings at the acquisition date represents the non-controlling equity interests in Cowen Healthcare Royalty GP, LLC and CHRP Overflow Fund GP, LLC (collectively, the “CHRP GPs”), the general partners, respectively, to Cowen Healthcare Royalty Partners, L.P. and CHRP Overflow Fund, L.P. (the “CHRP Funds”), and are recorded at fair value. The CHRP GPs' only significant assets are their investments in the CHRP Funds, which invest principally in commercial‑stage biopharmaceutical products and companies through the purchase of royalty or synthetic royalty interests and structured debt and equity instruments. The CHRP Funds follow industry practices for valuation techniques including discounted cash flows, Black‑Scholes valuation models and sale price of recent transactions in the same or similar securities and significant inputs such as estimated future cash flows, discount rates, volatility and dividend yield to measure the fair value of the investments in the CHRP Funds. As such, the carrying value of CHRP GP's investments in the CHRP Funds, and the related non-controlling interest, approximate fair value.

Based on the November 2, 2009 estimated purchase price allocation, the purchase price of $114.5 million exceeded the fair value of the net identifiable assets acquired and liabilities assumed (net of non-controlling interest) of $107.3 million. As a result, the Company has recognized goodwill of $7.2 million related to the Transactions. The goodwill primarily relates to expected synergies from the merger. All of the goodwill has been assigned to the broker‑dealer segment of the Company. None of the goodwill is expected to be deductible for tax purposes. See Note 10 for a discussion of the intangible assets acquired and their amortization periods.

In addition to the purchase price consideration, the Company incurred acquisition related expenses of $12.2 million related to the Transactions, which are included in professional, advisory and other fees in the consolidated statement of operations for the year ended 2009.

Included in the accompanying consolidated statements of operations for the year ended December 31, 2009 are revenues of $31.2 million and a net loss of $15.0 million related to Cowen Holdings for the period from November 2, 2009 through December 31, 2009. The following table provides unaudited supplemental pro forma financial information for the year ended December 31, 2009 as if the Transactions had occurred as of the beginning of the period presented:



	Year ended December 31,
	2009
	(in thousands, except per share data)
	(unaudited)
Revenues	$	284,459
Net income (loss)	(100,759		)
Net income (loss) attributable to Cowen Group, Inc. stockholders	(116,719		)

Net income (loss) per common share:
Basic	$	(2.12	)
Diluted	(2.12		)

These amounts have been determined after applying the Company's accounting policies and adjusting the results for nonrecurring items, including the net deferred tax benefits and transaction costs, as if it had been applied as of January 1, 2009.

On November 2, 2009, in connection with the Transactions, Cowen Holdings purchased from HVB Alternative Advisors LLC (“HVB”) the 50% interest in Ramius Alternative Solutions LLC (“Ramius Alternative Solutions”), the Company's alternative solution business, that HVB owned in exchange for (1) the Company's issuance to HVB of 2,713,882 shares of the Company's Class A common stock and (2) approximately $10.4 million in cash, resulting in Ramius Alternative Solutions becoming an indirect wholly owned subsidiary of the Company. In accordance with US GAAP the acquisition of the additional interest in the Company's alternative solution business was treated as an equity transaction and the difference between the fair value of the consideration paid and the carrying value of the derecognized non-controlling interest was recognized in equity.