Acquisitions

12 Months Ended

Dec. 31, 2011

Acquisitions [Abstract]

ACQUISITIONS

NOTE 4. ACQUISITIONS

For each of the acquisitions described below, the results of operations and the estimated fair value of the assets acquired and liabilities assumed have been included in the Consolidated Financial Statements from the date of the acquisition.

2011 Acquisitions

During fiscal 2011, Cadence acquired companies for an aggregate purchase price of $49.3 million and recorded a total of $32.3 million of goodwill and $21.6 million of other intangible assets. The intangibles are being amortized over a weighted-average life of approximately 7 years. The $32.3 million of goodwill is not expected to be deductible for income tax purposes.

One of the 2011 acquisitions includes contingent consideration payments based on certain future financial measures associated with the acquired technology. This contingent consideration arrangement requires payments of up to $5.0 million if certain financial measures are met during the three-year period subsequent to October 1, 2011. The fair value of the contingent consideration arrangement recorded on the date of the acquisition was $3.5 million. The fair value of the contingent consideration as of December 31, 2011 was $3.7 million and included $0.2 million of accretion recorded after the date of acquisition.

Denali Software, Inc.

In June 2010, Cadence acquired Denali Software, Inc., or Denali, a privately-held provider of electronic design automation software and intellectual property used in system-on-chip design and verification. Cadence acquired Denali to expand its portfolio to provide system component modeling and Design IP. The goodwill associated with Cadence’s acquisition of Denali resulted primarily from Cadence’s expectation of synergies from the integration of Denali’s product offerings with Cadence’s EDA product offerings. The aggregate initial purchase price was $296.8 million in cash. An additional $12.6 million of payments were deferred on the acquisition date, of which $0.8 million remains unpaid as of December 31, 2011 and is conditioned upon certain Denali shareholders remaining employees of Cadence over the stated retention periods. Of the $12.6 million deferred purchase price, Cadence expensed $1.5 million during fiscal 2011 and $10.2 million during fiscal 2010, and Cadence expects to expense the remaining $0.9 million over the stated retention periods through 2014. The $152.2 million of goodwill recorded in connection with this acquisition is not expected to be deductible for income tax purposes. This acquisition did not include any contingent consideration that is subject to performance metrics, milestone achievement or other similar criteria.

The following table summarizes the allocation of the purchase price for Denali and the estimated amortization period for the acquired intangibles:

	(In thousands)
Current assets	$	59,398
Property, plant and equipment		347
Other assets		283
Acquired intangibles:
Existing technology (six- to nine-year weighted-average useful lives)		65,700
Agreements and relationships (three- to twelve-year weighted-average useful lives)		98,800
Tradenames / trademarks / patents (ten-year weighted-average useful life)		4,300
Goodwill		152,172
Total assets acquired		381,000
Current liabilities		(17,042	)
Long-term deferred tax liabilities (Note 6)		(67,153	)
Net assets acquired	$	296,805

Denali’s current assets, property, plant and equipment and other assets were reviewed and adjusted to their fair value on the date of acquisition, as necessary. Among the current assets acquired, $46.7 million consisted of cash and cash equivalents and $11.1 million consisted of trade receivables.

Denali’s current liabilities were reviewed and adjusted to their fair value on the date of acquisition, as necessary. Included in net current liabilities is deferred revenue, which represents advance payments from customers. Cadence estimated its obligation related to the deferred revenue using the cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to supporting the obligation plus an assumed profit. The sum of the costs and assumed profit approximates the amount that Cadence would be required to pay a third party to assume the obligation. The estimated costs to fulfill the obligation were based on the projected cost structure to provide the contractual deliverables. As a result, Cadence recorded deferred revenue of $11.3 million, representing Cadence’s estimate of the fair value of the contractual obligations assumed.

The financial information in the table below summarizes the combined results of operations of Cadence and Denali, on a pro forma basis, as though the companies had been combined as of the beginning of fiscal 2010 and fiscal 2009. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 3, 2010 or January 4, 2009 or of results that may occur in the future.

	2010		2009
	(In thousands)
Total revenue	$	947,849	$	879,561
Net income (loss)	$	109,828	$	(180,410	)

Because Cadence recorded deferred taxes of $66.7 million, primarily related to the intangible assets acquired with Denali, Cadence released a corresponding amount of its deferred tax asset valuation allowance. The $66.7 million release of the valuation allowance was recognized as a benefit for income taxes during fiscal 2010. The pro forma net income (loss) presented above does not include this non-recurring benefit for income taxes. The pro forma tax effects were calculated considering Cadence’s valuation allowance position on its United States losses and tax credits. For an additional description of Cadence’s income taxes, see Note 6.

Other 2010 Acquisition

During fiscal 2010, Cadence acquired another company and recorded $3.9 million of goodwill and $2.2 million of intangible assets. The $3.9 million of goodwill recorded in connection with this acquisition is not expected to be deductible for income tax purposes. Of the $2.2 million of intangible assets, $0.5 million was allocated to in-process research and development and is classified as an indefinite-lived intangible asset until the project is completed or abandoned. The remaining $1.7 million of intangible assets has a weighted-average life of 5 years.

This acquisition includes contingent consideration payments based on future financial measures of the acquired technology. The contingent consideration arrangement requires payments of up to $4.0 million if certain financial measures are met during the three-year period subsequent to the consummation of the acquisition. The fair value of the contingent consideration arrangement recorded on the date of the acquisition was $0.8 million. The fair value of the contingent consideration as of December 31, 2011 was $0.2 million.

Acquisition-Related Contingent Consideration

For business combinations completed after January 3, 2009, contingent consideration is recorded at fair value on the acquisition date and adjusted to fair value at the end of each reporting period.

In connection with Cadence’s business combinations and asset acquisitions, Cadence may be obligated to make cash payments based on, or subject to the satisfaction of, certain performance metrics. If performance is such that these payments are fully achieved, Cadence may be obligated to pay up to an aggregate of $30.7 million over the next 52 months. Of the $30.7 million, up to $20.6 million would be recorded as operating expenses in the Consolidated Statements of Operations and up to $5.6 million would be recorded as additional goodwill.