Business Combinations

12 Months Ended

Dec. 29, 2012

Business Combinations [Abstract]

Business Combinations

NOTE 2. BUSINESS COMBINATIONS

Acquisition of Wintegra, Inc.

On November 18, 2010, PMC completed its previously announced acquisition of Wintegra, Inc. (“Wintegra”) a privately held Delaware corporation, pursuant to an amendment to the Agreement and Plan of Merger dated as of October 21, 2010 (“the Merger Agreement”). The Company’s acquisition, pursuant to the Merger Agreement, was effected by merging a wholly owned subsidiary of the Company into Wintegra, with Wintegra continuing on as the surviving corporation and as a direct wholly-owned subsidiary of PMC.

PMC purchased Wintegra to accelerate the Company’s product offering in IP/Ethernet packet-based mobile backhaul equipment and because the acquisition fit strategically with the Company’s overall efforts to accelerate the transition of existing communications equipment to converged, packet-centric solutions. Prior to November 18, 2010, the Company owned 2.6% of the outstanding shares of Wintegra, as a cost investment, with a carrying value of $2 million. The fair value immediately prior to the acquisition date was $6.5 million. Upon acquiring the remaining equity interests of Wintegra, the Company recorded a gain on the step-acquisition on this pre-existing investment of $4.5 million which was included in Other (Expense) Income, net in the Consolidated Statement of Operations.

The fair value of the purchase price consideration as of the acquisition date was, as follows:

(in thousands)
Cash	$	218,064
Contingent consideration		28,194
Fair value of replacement equity awards attributable to pre-combination service		1,083
Total purchase price	$	247,341

Certain key employees entered into Holdback Escrow Agreements, whereby a portion of cash consideration otherwise payable per the Merger Agreement was retained and would be distributed under certain conditions, including continued employment over a two-year period. This post-combination expense has been included in the Consolidated Balance Sheet as current prepaid expenses and was amortized straight-line over the two-year period, which ended during the fourth quarter of 2012.  Amortization for the year ended December 29, 2012 was $1.2 million.

Former Wintegra equity holders could have been entitled to receive an additional earn-out payment, which ranged from $nil to $60 million, calculated on the basis of Wintegra’s calendar year 2011 revenue above an agreed threshold as described in the Merger Agreement. The fair value of the earn-out reflected in the purchase price as contingent consideration was determined using a income approach, using probability weighted discounted net present values with a discount rate of 4.75%.  At acquisition, the Company recorded a liability for contingent purchased consideration of $28.2million relating to this earn-out.  During the three months ended October 2, 2011, the Company determined that Wintegra’s 2011 revenues would be below earn-out levels and the former Wintegra equity holders would not be eligible to receive this additional earn-out payment.  Accordingly, the Company recognized a $29.4 million Revaluation of liability on contingent consideration in the Consolidated Statement of Operations.   Since the earn-out requirements were not met, the Company had no obligations in connection with the contingent earn-out consideration and had no liability recorded for this as of December 31, 2011.

Replacement stock options issued in connection with the acquisition were valued at $6.5 million. The fair values of stock options exchanged were determined using a Black-Scholes-Merton valuation model with the following assumptions: weighted average expected life of 5.06 years, weighted average risk-free interest rate of 1.5%, and a weighted average expected volatility of 54%. The fair values of unvested Wintegra stock options will be recorded as operating expenses on a straight-line basis over the remaining vesting periods, while the fair values of vested stock options are included in the purchase price. $1.1 million of this amount was attributed to pre-combination services and accordingly is recorded as purchase consideration, and $5.4 million will be recorded as post-combination compensation expense on a straight-line basis over the remaining vesting period.

On acquisition, the Company recorded a fair value adjustment related to the inventory acquired in the amount of $9.8 million, which was fully expensed through Cost of revenues by the end of the first quarter of 2011. The Company incurred $3.7 million in acquisition-related costs during 2010 and are included in selling, general and administrative expense. In addition, during 2011, the Company incurred $0.3 million in interest expense related to the short-term loan that the Company obtained to facilitate this acquisition, which is included in Other Income, net, in the Consolidated Statement of Operations.

The total purchase price has been allocated to the fair value of assets and liabilities acquired, and the excess of purchase price over the aggregate fair values was recorded as goodwill.  The Company has made a correction in the measurement of liabilities and goodwill previously recognized on acquisition. See Note 19. Error Corrections.

The allocation of the purchase price was as follows:

Current assets (including cash acquired of $17.3 million)	$	41,463
Other long-term assets		1,638
Intangible assets		104,000
Goodwill		121,032
Total assets	$	268,133
Current liabilities	$	13,442
Long-term liabilities		7,350
Total liabilities		20,792
Total purchase consideration	$	247,341

Intangible assets acquired, and their respective estimated average remaining useful lives over which they are amortized on a straight-line basis, are:

			Estimated
		Estimated	average remaining
(in thousands)		fair value	useful life
Existing technology	$	66,300	4 years
Core technology		12,900	5 years
Customer relationships		16,500	5 years
In-process research and development		6,000	4-5 years
Trademarks		2,300	8 years
Total intangible assets	$	104,000

Goodwill

The Company’s primary reasons for the Wintegra acquisition were to accelerate the Company’s product offering in IP/Ethernet packet-based mobile backhaul equipment and to capitalize on the strategic fit between Wintegra’s business and the Company’s overall efforts to accelerate the transition of existing communications equipment to converged, packet-centric solutions. The acquisition also enhanced the Company’s engineering team through the addition of Wintegra’s research and development resources. These factors were the basis for the recognition of goodwill. The goodwill is not deductible for tax purposes.  See Note 18. Impairment of Goodwill and Long-Lived Assets.

Purchased Intangible Assets

Existing and core technology represent completed technology that has passed technological feasibility and/or is currently offered for sale to customers. The Company used the income method to value existing and core technology by determining cash flow projections related to the identified projects. The assumptions included information on revenues from existing products and future expected trends for each technology, with an estimated useful life of four to five years. Management applied a discount rate of 16% to value the existing and core technology assets, which took into consideration market rates of return on debt and equity capital and the risk associated with achieving forecasted revenues related to these assets.

Customer relationships represent the fair value of future projected revenue that will be derived from the sale of products to existing customers of the acquired company. The Company used the same method to determine the fair value of this intangible asset as core technology assets and utilized a discount rate of 24%.

Trademarks represent the value of the revenues associated with the WinPath registered trademark, which the Company will continue to use on products for which it has established revenue streams. The Company used the same method to determine the fair value of trademarks and utilized a discount rate of 18%.

See Note 18. Impairment of Goodwill and Long-Lived Assets.

In-Process Research and Development

The fair value of acquired in-process research and development was determined using the income approach. Under this approach, the expected future cash flows from each project under development are estimated and discounted to their net present values using a risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted average cost of capital, the return on assets, as well as risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration and growth rates.

These projects progressed as expected, and are now completed. 

Acquisition of Channel Storage Business

On June 8, 2010, the Company completed the acquisition of the Channel Storage Business from Adaptec, Inc. (“Adaptec”) pursuant to the terms of the Asset Purchase Agreement dated May 8, 2010 and Amendment to Asset Purchase Agreement dated June 8, 2010 between PMC and Adaptec (together the “Purchase Agreement”). Under the terms of the Purchase Agreement, PMC purchased the Channel Storage business for $34.3 million incash. The Channel Storage business includes Adaptec’s redundant array of independent disks storage product line, a well-established global value added reseller customer base, board logistics capabilities, and leading SSD cache performance solutions.

The total purchase price has been allocated to the fair values of assets acquired and liabilities assumed as follows:

(in thousands)
Financial assets	$	8,855
Inventory and other		6,214
Property and equipment		892
Intangible assets (see below)		21,300
Goodwill		1,828
Financial liabilities		(4,839	)
Net assets acquired	$	34,250

Intangible assets acquired, and their respective estimated remaining useful lives over which each they are amortized on a straight-line basis, are:

(in thousands)	Estimated fair value		Estimated average remaining useful life
Technology and patents	$	10,100		3 to 9 years
Customer/Distributor relationships		7,500		2 to 6 years
Trademarks and other		3,700		6 years
Total intangible assets acquired	$	21,300

During 2010, the Company incurred $0.2 million and $3.2 million in acquisition-related costs which were expensed and recognized as cost of revenues and selling, general and administrative, respectively.