Business Combinations

12 Months Ended

Apr. 01, 2012

Business Combinations [Abstract]

Business Combinations

NOTE 3.    BUSINESS COMBINATIONS

On March 16, 2010, we completed the acquisition of Neterion, Inc. (“Neterion”), a supplier of 10 Gigabit Ethernet (“GbE”) controller silicon and card solutions optimized for virtualized data centers located in Sunnyvale, California.

On June 17, 2009, we completed the acquisition of Galazar Networks, Inc. (“Galazar”), a fabless semiconductor company focused on carrier grade transport over telecom networks based in Ottawa, Ontario, Canada. Galazar’s product portfolio addressed transport of a wide range of datacom and telecom services including Ethernet, SAN, TDM and video over SONET/SDH, PDH and OTN networks.

On April 3, 2009, we completed the acquisition of hi/fn, inc. (“Hifn”), a provider of network-and storage-security and data reduction products located in Los Gatos, California.

The historical results of operations of Neterion, Galazar and Hifn prior to the acquisition were not material to the Company’s results of operations.

We periodically evaluate potential strategic acquisitions to expand sales and build upon our existing library of intellectual property, human capital and engineering talent, in order to expand our capabilities in the areas in which we operate or to acquire complementary businesses.

We account for each business combination by applying the acquisition method, which requires (i) identifying the acquiree; (ii) determining the acquisition date; (iii) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest we have in the acquiree at their acquisition date fair value; and (iv) recognizing and measuring goodwill or a gain from a bargain purchase.

Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, we typically account for the acquired contingencies using existing guidance for a reasonable estimate.

To establish fair value, we measure the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants. The measurement assumes the highest and best use of the asset by the market participants that would maximize the value of the asset or the group of assets within which the asset would be used at the measurement date, even if the intended use of the asset is different.

Acquisition related costs, including finder’s fees, advisory, legal, accounting, valuation and other professional or consulting fees are accounted for as expenses in the periods in which the costs are incurred and the services are received, with the exception that the costs to issue debt or equity securities are recognized in accordance with other applicable GAAP.

Acquisition of Neterion

On March 16, 2010, we completed the acquisition of Neterion, a supplier of 10 GbE controller silicon and card solutions optimized for virtualized data centers based in Sunnyvale, California. Neterion’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning March 17, 2010. On March 4 2011, we decided to exit the data center virtualization market, and, in connection therewith, to stop development of our 10GbE network interface cards. Therefore, the results of operations of Neterion were included in our consolidated financial statements from March 17, 2010 through March 4, 2011.

Consideration

We paid approximately $2.3 million in cash for Neterion, representing the fair value of total consideration transferred.

Acquisition Related Costs

Acquisition related costs, or deal costs, relating to Neterion are included in the selling, general and administrative line on the consolidated statement of operations. No acquisition related costs relating to Neterion were incurred during fiscal year 2012. Acquisition related costs relating to Neterion were immaterial in fiscal year 2011. In fiscal year 2010, we recorded $0.5 million in acquisition related costs relating to Neterion.

Restructuring Charges and Exit Costs

For disclosure regarding restructuring costs, see “Note 7—Restructuring Charges and Exit Costs” contained herein.

Purchase Price Allocation

The allocation of the purchase price to Neterion’s tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition.

The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill. The $464,000 in goodwill resulted primarily from our expected synergies from the integration of Neterion’s technology into our product offerings. Goodwill is not deductible for tax purposes.

The fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed in the Neterion acquisition was as follows (in thousands):

	As of March 16, 2010
Identifiable tangible assets
Cash and cash equivalents	$	747
Accounts receivable		313
Inventories		617
Other current assets		311
Other assets		651
Accounts payable and accruals		(592	)
Other liabilities		(2,920	)
Debt		(6,963	)
Total identifiable tangible assets, net		(7,836	)
Identifiable intangible assets		9,700
Total identifiable assets, net		1,864
Goodwill		464
Fair value of total consideration transferred	$	2,328

Subsequent to the Neterion acquisition, there were no adjustments to the fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed on March 16, 2010.

Identifiable Intangible Assets

The following table sets forth the components of the identifiable intangible assets acquired in the Neterion acquisition, which are being amortized over their estimated useful lives, with a maximum amortization period of six years, on a straight-line basis with no residual value:

	Fair Value		Useful Life
	(in thousands)		(in years)
Existing technology	$	5,600		4.0
Patents/Core technology		900		6.0
In-process research and development		800		—
Customer relationships		2,100		6.0
Tradenames/Trademarks		100		2.0
Non-Compete Agreements		100		1.3
Order backlog		100		0.2
Total acquired identifiable intangible assets	$	9,700

We allocated the purchase price using the established valuation techniques described below.

Inventories—The value allocated to inventories reflects the estimated fair value of the acquired inventory based on the expected sales price of the inventory, less reasonable selling margin. The estimated fair value of raw materials is generally equal to their book value, due to the fact that raw materials have not been used to develop any finished goods or work-in-progress and therefore, there is no value added to the raw materials.

Intangible assets—The fair values of existing technology, patents/core technology, in-process research and development, customer relationships, tradenames/trademarks, non-compete agreements and order backlog were determined using the income approach, which discounted expected future cash flows to present value, taking into account multiple factors including, but not limited to, the stage of completion, estimated costs to complete, utilization of patents/core technology, the risks related to successful completion, and the markets served. The cash flows were discounted at rates ranging from 4% to 33%. The discount rate used to value the existing intangible assets was 20%.

Acquired In-Process Research and Development—The IPR&D project underway at Neterion at the acquisition date related to the X3500 product series and as of such acquisition date had incurred approximately $2.9 million in expense. This project was abandoned in March 2011 when we exited the 10 GbE market, resulting in a charge of $0.8 million in fiscal year 2011. (See “Note 9—Goodwill and Intangible Assets”).

Acquisition of Galazar

On June 17, 2009, we completed the acquisition of Galazar, a fabless semiconductor company focused on carrier grade transport over telecom networks based in Ottawa, Ontario, Canada. Galazar’s product portfolio addressed transport of a wide range of datacom and telecom services including Ethernet, SAN, TDM and video over SONET/SDH, PDH and OTN networks. Galazar’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning June 18, 2009. On February 1, 2012, we terminated our development efforts in connection with our pre-production OTN products. Therefore, the results of operations of Galazar were included in our consolidated financial statements from June 18, 2009 through February 1, 2012.

Consideration

We paid approximately $5.0 million in cash for Galazar, representing the fair value of total consideration transferred. This amount included approximately $1.0 million contingent consideration that, for the purposes of valuation, was assigned a 95% probability or a fair value of $0.95 million. This payment was contingent on Galazar achieving a project milestone within a twelve-month period following the close of the transaction. This milestone was met during the three months ended December 27, 2009 and $1.0 million was paid in cash. The additional $50,000 was expensed and included in the research and development line on the consolidated statement of operations for fiscal year 2010.

Acquisition Related Costs

Acquisition related costs, or deal costs, relating to Galazar are included in the selling, general and administrative line on the consolidated statement of operations. No acquisition related costs relating to Galazar were incurred during fiscal year 2012 or fiscal year 2011. In fiscal year 2010, we recorded $0.9 million in acquisition related costs relating to Galazar.

Restructuring Charges and Exit Costs

For disclosure regarding restructuring costs, see “Note 7—Restructuring Charges and Exit Costs” contained herein.

Purchase Price Allocation

The allocation of the purchase price to Galazar’s tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition.

The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill. The $372,000 in goodwill resulted primarily from our expected synergies from the integration of Galazar’s technology into our product offerings. Goodwill is not deductible for tax purposes.

The fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed in the Galazar acquisition was as follows (in thousands):

	As of June 17, 2009
Identifiable tangible assets
Cash and cash equivalents	$	506
Other current assets		909
Other assets		250
Accounts payable and accruals		(93	)
Accrued compensation and related benefits		(230	)
Other obligations		(224	)
Total identifiable tangible assets, net		1,118
Identifiable intangible assets		3,460
Total identifiable assets, net		4,578
Goodwill		372
Fair value of total consideration transferred	$	4,950

Subsequent to the Galazar acquisition, there were no adjustments to the fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed on June 17, 2009.

Identifiable Intangible Assets

The following table sets forth the components of the identifiable intangible assets acquired in the Galazar acquisition, which are being amortized over their estimated useful lives, with a maximum amortization period of six years, on a straight-line basis with no residual value:

	Fair Value		Useful Life
	(in thousands)		(in years)
Existing technology	$	2,100		6.0
Patents/Core technology		400		6.0
In-process research and development		300		—
Customer relationships		500		6.0
Tradenames/Trademarks		100		3.0
Order backlog		60		0.3
Total acquired identifiable intangible assets	$	3,460

We allocated the purchase price using the established valuation techniques described below.

Intangible assets—The fair value of existing technology, patents/core technology, in-process research and development, customer relationships, tradenames/trademarks and order backlog were determined using the income approach, which discounted expected future cash flows to present value, taking into account multiple factors including, but not limited to, the stage of completion, estimated costs to complete, utilization of patents and core technology, the risks related to successful completion, and the markets served. The cash flows were discounted at rates ranging from 5% to 35%. The discount rate used to value the existing intangible assets was 28%.

Acquired In-Process Research and Development—The IPR&D project underway at Galazar at the acquisition date relates to the MXP2 product for the OTN market and as of such acquisition date had incurred approximately $2.3 million in expense. In February 2012, we decided to discontinue all future development related to this project. As a result, we abandoned the related IPR&D and recorded $0.3 million expense in fiscal year 2012. (See “Note 9—Goodwill and Intangible Assets”).

Acquisition of Hifn

On April 3, 2009, we completed the acquisition of Hifn, a provider of network-and storage-security and data reduction products located in Los Gatos, California. Hifn’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning April 4, 2009.

Consideration

The following table summarizes the consideration paid for Hifn, representing the fair value of total consideration transferred (in thousands):

	Amounts
Cash	$	56,825
Equity instruments		2,784
Total consideration paid	$	59,609

The $2.8 million estimated fair value for equity instruments represented approximately 429,600 shares of Exar’s common stock, valued at $6.48 per share, the closing price reported on the NASDAQ on April 3, 2009 (the acquisition date).

Acquisition Related Costs

Acquisition related costs, or deal costs, relating to Hifn are included in the selling, general and administrative line on the consolidated statement of operations. No acquisition related costs relating to Hifn were incurred during fiscal year 2012. Acquisition related costs incurred in fiscal year 2011 relating to Hifn were immaterial. In fiscal year 2010, we incurred $3.8 million of acquisition related costs relating to Hifn.

Purchase Price Allocation

The allocation of the purchase price to Hifn’s tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition. Subsequent to the acquisition, we recorded $1.0 million in restructuring expenses relating to Hifn for fiscal year 2010, relating to severance and a building lease obligation in Los Gatos, California. Severance costs relating to Hifn incurred during fiscal year 2011 were immaterial.

The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill. The $2.2 million in goodwill resulted primarily from our expected future product sales synergies from combining Hifn’s products with our product offerings. Goodwill is not deductible for tax purposes.

The fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed on April 3, 2009 in the Hifn acquisition was as follows (in thousands):

	As of April 3, 2009
Identifiable tangible assets
Cash and cash equivalents	$	16,468
Short-term marketable securities		14,133
Accounts receivable		2,982
Inventories		4,269
Other current assets		1,683
Property, plant and equipment		2,013
Other assets		1,721
Accounts payable and accruals		(586	)
Accrued compensation and related benefits		(1,860	)
Other current liabilities		(2,963	)
Total identifiable tangible assets, net		37,860
Identifiable intangible assets		19,500
Total identifiable assets, net		57,360
Goodwill		2,249
Fair value of total consideration transferred	$	59,609

Subsequent to the Hifn acquisition, there were no adjustments to the fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed on April 3, 2009.

Identifiable Intangible Assets

The following table sets forth the components of the identifiable intangible assets acquired in the Hifn acquisition, which are being amortized over their estimated useful lives, with a maximum amortization period of seven years, on a straight-line basis with no residual value:

	Fair Value		Useful Life
	(in thousands)		(in years)
Existing technology	$	9,000		5.0
Patents/Core technology		1,500		5.0
In-process research and development		1,600		—
Customer relationships		1,300		7.0
Tradenames/Trademarks		700		3.0
Order backlog		900		0.5
Research and development reimbursement contract		4,500		1.5
Total acquired identifiable intangible assets	$	19,500

We allocated the purchase price using the established valuation techniques as described below.

Inventories—Inventories acquired in connection with the Hifn acquisition were finished goods. The value allocated to inventories reflects the estimated fair value of the acquired inventory based on the expected sales price of the inventory, less reasonable selling margin.

Property, plant and equipment—The basis used for our analysis is the fair value in continued use, which is expressed in terms of the price a willing and informed buyer would pay contemplating continued use as part of the assets in place for the purpose for which they were designed, engineered, installed, fabricated and erected.

Intangible assets—The fair value of existing technology, patents/core technology, in-process research and development, customer relationships, tradenames/trademarks, order backlog and research and development reimbursement contract were determined using the income approach, which discounted expected future cash flows to present value, taking into account multiple factors including, but not limited to, the stage of completion, estimated costs to complete, utilization of patents and core technology, the risks related to successful completion, and the markets served. The cash flows were discounted at rates ranging from 5% to 30%. The discount rate used to value the existing intangible assets was 14%.

Acquired In-Process Research and Development—The IPR&D projects underway at Hifn at the acquisition date were in the security processors and de-duplication product families, each consisting of one project, and as of such acquisition date Hifn had incurred approximately $2.6 million and $1.1 million in costs related to those projects, respectively. The percentage of completion for these projects, at the date of acquisition, was 90% and 30%, respectively. The total R&D expenditures expected to be incurred to complete the security processors and de-duplication projects were approximately $2.1 million and $0.7 million, respectively, based on project development timelines and resource requirements. The IPR&D projects for de-duplication and security processors were completed in January 2010 and July 2010, respectively, and are in production. The fair value, at date of acquisition, for the security processors is being amortized over an estimated useful life of five years. We exited the de-duplication market in February 2012, which shortened the remaining useful life of the related intangible asset to two months, resulting in $0.3 million in amortization during the last two months of fiscal year 2012. (See “Note 9—Goodwill and Intangible Assets”).