2. ACQUISITIONS

Zarlink Semiconductor, Inc.

During the quarter ended January 1, 2012, we completed our acquisition of Zarlink Semiconductor, Inc. (“Zarlink”) through a wholly-owned subsidiary. Following the expiration of the previously announced offers for all of the issued and outstanding common shares (“Zarlink Shares”) and 6% unsecured, subordinated convertible debentures maturing September 30, 2012 (“Zarlink Debentures” and together with the Zarlink Shares, the “Zarlink Securities”) of Zarlink, we acquired all remaining Zarlink Shares and Zarlink Debentures for $623.7 million in cash through compulsory acquisitions under, respectively, the Canada Business Corporations Act and the trust indenture governing the Zarlink Debentures. We acquired Zarlink for its world-leading, mixed-signal chip technologies for a broad range of communication and medical applications. Zarlink’s core capabilities include timing solutions that manage time-sensitive communication applications over wireless and wired networks, line circuits supporting high-quality voice services over cable and broadband connections, and ultra low-power radios enabling new wireless medical devices and therapies. Serving the world’s largest original equipment manufacturers, Zarlink’s highly integrated chip solutions help customers simplify design, lower costs and reach market quickly. We sometimes refer to this division herein as “Microsemi – CMPG.”

We preliminarily allocated the total estimated consideration to Zarlink’s tangible and intangible assets and liabilities based on their estimated fair values as of the date of the completion of the transaction. The preliminary estimated consideration is allocated as follows (in thousands):


Cash and cash equivalents	$	83,497
Accounts receivable		17,980
Inventory		28,403
Other current assets		37,585
Property and equipment		7,648
Other assets		41,639
Identifiable intangible assets		210,100
Goodwill		294,586
Current liabilities		(57,540	)
Deferred tax liabilities		(35,963	)
Other non-current liabilities		(4,265	)

Total estimated consideration	$	623,670

Identifiable intangible assets and their estimated useful lives are as follows (amounts in thousands):


	Asset Amount		Weighted Average Useful Life (Years)
Completed technology	$	47,800		6
Customer relationships		144,600		6
Backlog		15,700		1
Trade name		2,000		2

	$	210,100

Timing, Synchronization and Synthesis Business of Maxim Integrated Products, Inc.

During the quarter ended April 1, 2012, we acquired the timing, synchronization and synthesis business of Maxim Integrated Products, Inc. for $44.0 million in cash. The acquired product lines and technology are vital to the effective and efficient delivery of time-sensitive voice, data and multimedia traffic over wireless and wired networks, and will further provide our customers with the critical synchronization components required to harmonize system and network clocks, as well as the synthesis products required to distribute timing clocks throughout each system.

We preliminarily allocated the total estimated consideration to the acquired business’ tangible and intangible assets and liabilities based on their estimated fair values as of the date of the completion of the transaction. The preliminary estimated consideration is allocated as follows (in thousands):


Inventory	$	2,741
Property and equipment		4
Identifiable intangible assets		12,960
Goodwill		28,509
Current liabilities		(169	)

Total estimated consideration	$	44,045

Identifiable intangible assets and their estimated useful lives are as follows (amounts in thousands):


	Asset Amount		Weighted Average Useful Life (Years)
Completed technology	$	6,000		5
Customer relationships		6,700		5
Backlog		260		1

	$	12,960

Valuation methodology

The fair value of the identified intangible assets for the acquisitions noted above was estimated by performing a discounted cash flow analysis using the “income” approach. This method includes a forecast of direct revenues and costs associated with the respective intangible assets and charges for economic returns on tangible and intangible assets utilized in cash flow generation. Net cash flows attributable to the identified intangible assets were discounted to their present value at a rate commensurate with the perceived risk. The projected cash flow assumptions considered contractual relationships, customer attrition, eventual development of new technologies and market competition.

The valuation of completed technology and trade names for the acquisitions noted above was based on a variation of the income approach, the relief-from-royalty income approach. The premise of the relief-from-royalty income approach is that if we had not been assigned the rights to the technology and trade names, we would have to pay royalties to continue to exploit the technology and trade names covered by their claims. To arrive at an estimate of royalty charges, the acquired entity’s revenue and profit margins were analyzed to determine the ability to pay a royalty. In addition, the license databases were searched for actual royalty terms based on transactions involving technology and trade name licensing.

The useful lives of completed technology rights are based on the number of years in which net cash flows have been projected. The useful life of backlog is estimated based upon the fulfillment period. The useful lives of customer relationships are estimated based upon the length of the relationships currently in place, historical attrition patterns and natural growth and diversification of other potential customers. The useful life of a trade name was estimated based on the period in which a benefit could be ascribed to the identified trade names.

Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:

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Historical performance including sales and profitability.

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Business prospects and industry expectations.

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Estimated economic life of asset.

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Development of new technologies.

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Acquisition of new customers.

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Attrition of existing customers.

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Obsolescence of technology over time.

Generally, the allocation of purchase prices results in an allocation to goodwill. Depending on the tax treatment of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax purposes. The factors that contributed to a purchase price resulting in the recognition of goodwill include:

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The premium paid over market capitalization immediately prior to the merger announcement.

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Our belief that the merger will create a more diverse semiconductor company with expansive offerings which will enable us to expand our product offerings.

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Our belief that both companies are committed to improving cost structures and that our combined efforts after the merger should result in a realization of cost savings and an improvement of overall efficiencies.

The purchase price allocations described above are preliminary. A final determination of fair values of assets acquired and liabilities assumed relating to the transactions could differ from the preliminary purchase price allocations and if material differences exist they could result in retrospective revision to the purchase price allocations. We utilized the straight line method of amortization for completed technology, customer relationships and trade name and the estimated fulfillment period for backlog.

Supplemental pro forma data

The following supplemental pro forma data summarizes the results of operations for the six months ended April 1, 2012 and April 3, 2011, as if the acquisitions we completed in 2012 and 2011 were completed as of the first day of 2011. The supplemental pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the transactions had been completed on the dates indicated, nor is it indicative of future operating results or financial position. Net sales and earnings for the acquisitions on a standalone basis since their acquisition dates are impracticable to determine, as on the acquisition date, we implemented a plan developed prior to the completion of the acquisition and began to immediately integrate these acquisitions into existing operations, engineering groups, sales distribution networks and management structure. The pro forma adjustments are based upon currently available information and certain assumptions that we believe are reasonable under the circumstances.

The supplemental pro forma data reports actual operating results, adjusted to include the pro forma effect of, among others, the impact in cost of goods sold from manufacturing profit in acquired inventory, amortization expense of identified intangible assets, timing of the impact of restructuring expenses, timing of credit facility issuance costs, foregone interest income, incremental interest expense and the related tax effect of these items. Supplemental pro forma earnings for the six months ended April 1, 2012 were adjusted to exclude $8.0 million in cost of goods sold from manufacturing profit in acquired inventory, $6.6 million in acquisition costs and $34.0 million in credit facility refinancing costs associated with the Zarlink financing and supplemental pro forma earnings for the quarter ended April 3, 2011 were adjusted to include these items. Supplemental pro forma data does not adjust the timing of the refinancing completed in the quarter ended April 1, 2012. Supplemental pro forma data is as follows (amounts in thousands, except per share data):


	Six Months Ended
	April 1, 2012			April 3, 2011
Net sales	$	497,060		$	537,104
Net loss	$	(21,820	)	$	(22,641	)
Net loss per basic and diluted share	$	(0.26	)	$	(0.27	)