NOTE 3. Business Combination and Goodwill

On February 21, 2018, the Company acquired all of the outstanding stock of DI, an innovative technology leader providing progressive dealer websites, digital retailing and messaging platform products, and substantially all of the net assets of LDM, a provider of digital marketing services, including paid, organic, social and creative services (collectively, the “Acquisition”). The Acquisition consists of proprietary solutions that are complementary extensions of the Company’s online marketplace platform and current suite of dealer solutions.

The Company expensed as incurred total acquisition costs of $4.9 million, of which $4.3 million was recorded during the nine months ended September 30, 2018. These costs were recorded in General and administrative in the Consolidated and Combined Statements of Income. In connection with the Acquisition, DI’s unvested equity awards were cash settled for a total of $5.7 million. The fair value of these awards was based on the price paid per common share to the owners of the acquired businesses and recognized immediately after the Acquisition as compensation expense in the Company’s Consolidated and Combined Statements of Income.

Purchase Price Allocation. The fair values assigned to the tangible and intangible assets acquired and liabilities assumed were determined based on management’s estimates and assumptions, as well as other information compiled by management, including third party valuations that utilize customary valuation procedures and techniques, such as the income approach. These preliminary fair values are subject to change within the one-year measurement period. The Acquisition purchase price allocation is as follows (in thousands):


	Acquisition-date Fair Value
Cash consideration ⁽¹⁾	$	164,333
Contingent consideration ⁽²⁾		2,200
Cash settlement of DI's unvested equity awards ⁽³⁾		(5,700	)
Total consideration	$	160,833

Cash	$	1,480
Accounts receivable		11,400
Property and equipment		1,215
Other assets		320
Identified intangible assets ⁽⁴⁾		71,900
Total assets acquired		86,315
Accounts payable		(2,514	)
Deferred tax liability		(14,741	)
Other liabilities		(4,459	)
Total liabilities assumed		(21,714	)
Net identifiable assets		64,601
Goodwill		96,232
Total consideration	$	160,833

(1)

A reconciliation of cash consideration to Payment for Acquisition, net in the Consolidated and Combined Statements of Cash Flows is as follows (in thousands):

Cash consideration	$	164,333
Less: Cash settlement of DI's unvested equity awards ⁽³⁾		(5,700	)
Less: Cash acquired		(1,480	)
Payment for Acquisition, net	$	157,153

(2)

As part of the Acquisition, the Company may be required to pay up to an additional $15 million in cash consideration to the former owners of DI and LDM. The actual amount to be paid will be based on DI’s and LDM’s future performance related to certain revenue targets to be attained over a three-year performance period. The fair value was estimated utilizing the income approach valuation technique. The contingent consideration liability is recorded in Other noncurrent liabilities in the Consolidated and Combined Balance Sheets.

(3)

In connection with the Acquisition, DI’s unvested equity awards were cash settled. The fair value of these awards was based on the price paid per common share to the owners of the acquired businesses and recognized immediately after the Acquisition as compensation expense in the Company’s Consolidated and Combined Income Statements, as follows: $3.9 million in Product and technology, $1.0 million in Cost of revenues and operations, $0.5 million in Marketing and sales and $0.3 million in General and administrative.

(4)

Information regarding the identifiable intangible assets acquired is as follows:

	Acquisition-Date Fair Value (in thousands)		Weighted-Average Amortization Period (in years)
Acquired software	$	39,500	4
Customer relationships		18,300	4
Trade names		14,100	10
Total	$	71,900

In addition to the total consideration of $160.8 million, the Company granted stock-based compensation awards, worth up to $25.5 million, to certain employees. These awards require continued employee service and are based on DI’s and LDM’s future performance related to certain revenue targets to be attained over a three-year performance period. For further information, see Note 9 (Stock-Based Compensation).

Goodwill. In connection with the Acquisition, the Company recorded goodwill in the amount of $96.2 million, which is primarily attributable to sales growth from existing and future technology, product offerings and customers and the value of the acquired assembled workforce. Of the total goodwill recorded in connection with the Acquisition, approximately $15.0 million is deductible for income tax purposes. The Company’s goodwill activity for the nine months ended September 30, 2018 is as follows (in thousands):

December 31, 2017	$	788,107
Additions		96,232
September 30, 2018	$	884,339

Pro forma Financial Information (unaudited). The unaudited pro forma information presented below summarizes the combined revenues and net income of the Company and DI and LDM, as if the Acquisition had been completed on January 1, 2017 and gives effect to pro forma events that are factually supportable and directly attributable to the transaction. The unaudited pro forma results reflect adjustments for incremental intangible asset amortization based on the fair values of each identifiable intangible asset, interest expense on the borrowings under the revolving loan to fund the Acquisition, certain other compensation related costs including stock-based compensation and retention bonuses, and integration costs. Pro forma adjustments were tax-affected at the Company’s corporate blended statutory tax rate applicable during the respective periods presented.

This unaudited pro forma information is presented for informational purposes only and may not be indicative of the historical results of operations that would have been obtained if the Acquisition had taken place on January 1, 2017, nor the results that may be obtained in the future. The unaudited pro forma information does not reflect future synergies or other such costs or savings.

Selected unaudited pro forma information for the three months ended September 30, 2018 and 2017, respectively, is as follows (in thousands):

	Three Months Ended September 30,
	2018		2017
Revenues	$	169,312	$	171,025
Net income		16,540		17,342

From the date of the Acquisition, the Company included DI’s and LDM’s financial results in its Consolidated and Combined Statements of Income for the three and nine months ended September 30, 2018. A summary of DI and LDM contributed revenues and net loss is as follows:

Three Months Ended

September 30, 2018 ⁽¹⁾

Nine Months Ended

September 30, 2018 ⁽²⁾

Revenues

15,800

35,999

Net loss

(1,983

)

(10,120

)

(1)

The net loss includes $4.1 million of incremental intangible asset amortization related to the Acquisition and $0.7 million in acquisition-related costs, both of which are on a pre-tax basis.

(2)

The net loss includes $9.9 million of incremental intangible asset amortization and $7.5 million of costs related to the Acquisition, primarily related to the cash settlement of DI’s unvested equity awards and acquisition-related costs, both of which are on a pre-tax basis.