5. Acquisition

On May 31, 2011, we acquired all of the outstanding common stock of MKS Inc. (MKS), a publicly held company based in Ontario, Canada, for CDN $26.20 per share. We acquired MKS to expand our product offerings by adding MKS's application lifecycle management (ALM) software used in developing software intensive products to our existing software solutions. We believe that the unification of MKS's ALM solutions with PTC's product lifecycle management solutions will enable manufacturers to better align the development and management of a product's hardware and software components.

The total purchase price for MKS was comprised of:


	(in thousands)
Acquisition of MKS stock	$	280,397
Acquisition of MKS vested and unvested stock options		18,040

Total purchase price		298,437
Less: MKS cash acquired		(33,193	)

Total purchase price, net of cash acquired		265,244
Less: Purchase price related to PTC options issued for MKS unvested options		(91	)

Net cash used to acquire MKS	$	265,153

The purchase price included cash to settle outstanding vested stock options of MKS based on the purchase price of CDN $26.20 per share, and the conversion of unvested stock options of MKS into stock options to buy 146,998 shares of PTC common stock. We financed the transaction by drawing on our existing revolving credit facility in the amount of $250 million with the remainder funded by cash on hand.

MKS's results of operations have been included in PTC's consolidated financial statements beginning May 31, 2011. MKS had revenues of $79 million and $63 million for the twelve months ended April 30, 2011 and 2010, respectively. MKS's revenue for 2011 included a particularly large transaction. The acquisition added $6.0 million to our third quarter 2011 revenue and unfavorably impacted our operating income by approximately $7 million for the third quarter of 2011 when including acquisition-related costs of $6.0 million and amortization of acquired intangible assets of $0.9 million recorded during the quarter.

The acquisition of MKS has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date, May 31, 2011. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of MKS and PTC. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The allocation of the purchase price is based upon a valuation of assets and liabilities acquired. Our estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the purchase price allocation that are not yet finalized relate to income taxes and the amount of resulting goodwill.

Based upon a valuation, the total purchase price allocation was as follows:


	(in thousands)
Goodwill	$	191,649
Identifiable intangible assets		117,900
Cash		33,193
Accounts receivable		7,413
Property and equipment		4,880
Deferred revenue		(16,803	)
Deferred tax assets and liabilities, net		(34,242	)
Net assumed liabilities		(5,553	)

Total purchase price allocation		298,437
Less: MKS cash acquired		(33,193	)

Total purchase price allocation, net of cash acquired	$	265,244

The purchase price allocation resulted in $191.6 million of goodwill, the majority of which will not be deductible for income tax purposes. Intangible assets of $117.9 million includes purchased software of $36.9 million, customer relationships of $78.6 million and trademarks of $2.4 million, which are being amortized over weighted average useful lives of 7 years, 11 years and 7 years, respectively, based upon the pattern in which economic benefits related to such assets are expected to be realized. As a result, we recorded in the purchase accounting deferred tax liabilities of $42.6 million, equal to the tax effect of the amount of the acquired intangible assets other than goodwill and the fair value adjustment for deferred revenue. The resulting amount of goodwill reflects our expectations of the following synergistic benefits: (1) the potential to sell MKS products into our customer base and to sell PTC products into MKS's customer base; (2) our intention to leverage our larger sales force and our intellectual property to attract new contracts and revenue; and (3) our intention to leverage our established presence in global markets.

In the three and nine months ended July 2, 2011, we incurred $6.0 million and $6.6 million, respectively, of acquisition-related costs, primarily associated with our acquisition of MKS. Acquisition-related costs include direct costs of completing an acquisition (i.e., investment banker fees, professional fees, including legal and valuation services) and expenses related to acquisition integration activities (i.e., professional fees, severance, and retention bonuses) . These costs have been classified in general and administrative expenses in the accompanying consolidated statements of operations.

Pro Forma Financial Information (unaudited)

The unaudited financial information in the table below summarizes the combined results of operations of PTC and MKS, on a pro forma basis, as though the companies had been combined as of the beginning of PTC's fiscal year 2010. The pro forma information for all periods presented also includes the effects of business combination accounting resulting from the acquisition, including amortization charges from acquired intangibles assets, stock-based compensation charges for unvested stock options, interest expense on borrowings in connection with the acquisition, and the related tax effects as though the acquisition had been consummated as of the beginning of 2010. These pro forma results exclude the impact of the purchase accounting adjustment to deferred revenue and the transaction costs included in the historical results and the related tax effects. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place at the beginning of 2010. For the three months and nine months ended July 2, 2011, the pro forma financial information is based on PTC's results of operations for the three months and nine months ended July 2, 2011, which includes MKS's results beginning May 31, 2011, combined with MKS's results of operations for the two and eight months ended May 30, 2011. For the three months and nine months ended July 3, 2010, the pro forma financial information is based on PTC's results of operations for the three months and nine months ended July 3, 2010, combined with MKS's results of operations for the three and nine months ended July 31, 2010 (due to differences in reporting periods).


	Three months ended				Nine months ended
	July 2, 2011		July 3, 2010		July 2, 2011		July 3, 2010
	(in millions, except per share amounts)
Revenue	$	304.4	$	258.3	$	886.4	$	789.8
Net income	$	15.3	$	8.8	$	52.9	$	39.6
Earnings per share—Basic	$	0.13	$	0.08	$	0.45	$	0.34
Earnings per share—Diluted	$	0.13	$	0.07	$	0.44	$	0.33