Business Combinations

9 Months Ended

Sep. 30, 2011

Business Combinations [Abstract]

BUSINESS COMBINATIONS

5. BUSINESS COMBINATIONS

Acquisition of the television systems and set-top box business lines from NXP B.V.

On February 8, 2010, the Company and its wholly-owned subsidiary Trident Microsystems, (Far East), Ltd., or TMFE, a corporation organized under the laws of the Cayman Islands, completed the acquisition of the television systems and set-top box business lines from NXP B.V., a Dutch besloten vennootschap, or NXP. As a result of the acquisition, the Company issued 104,204,348 shares of Trident common stock to NXP, equal to 60% of the Company’s then total outstanding shares of Common Stock, after giving effect to the share issuance to NXP, in exchange for the contribution of selected assets and liabilities of the television systems and set-top box business lines from NXP and cash proceeds in the amount of $44 million. In accordance with U.S. generally accepted accounting principles, the closing price on February 8, 2010, of $1.81 per share, was used to value the Company’s common stock because it is traded in an active market and considered a Level 1 input. In addition, the Company issued to NXP four shares of a newly created Series B Preferred Stock or the Preferred Shares.

The acquisition was accounted for using the purchase method of accounting, and the Company was deemed to be the acquirer in accordance with applicable accounting guidance. The determination that Trident was the accounting acquirer was based on a review of all pertinent facts and circumstances. The following key factors of the acquisition transaction were considered by the Company to conclude that Trident was the acquirer:

The composition of the governing body of the combined entity — Major decisions require the approval of at least two-thirds of the members of Trident’s Board of Directors. Five of the nine members of the Board of Directors following the closing of the acquisition in February 2010 were legacy Company directors.

The composition of senior management of the combined entity — The senior management of the Company following the acquisition was primarily composed of members of the Company’s pre-acquisition senior management.

The relative voting rights in the combined entity after the business combination — NXP’s voting rights are limited, such that if all outstanding shares of Common Stock of Trident not held by NXP vote in favor of a stockholder proposal, then NXP is limited to voting a number of shares of Common Stock of Trident equal to 30% of the total outstanding shares against the proposal, and the remainder of the shares of the Common Stock held by NXP must be voted either (a) in accordance with the non-NXP stockholders, in this case for such proposal, or (b) in accordance with the recommendation of the Board of Directors as approved by a majority of the non-NXP members of the Trident Board of Directors.

The existence of a large minority voting interest in the combined entity if no other owner or organized group of owners has a significant voting interest — NXP may vote a number of shares of Common Stock of Trident equal to 30% of the total outstanding shares freely, with its voting of the remaining shares restricted such that the remaining shares may be voted either (a) in accordance with the recommendation of the Board of Directors as approved by a majority of the non-NXP directors, or (b) in the same proportion as the votes cast by all other stockholders.

The terms of the exchange of equity interests — The acquisition represented the purchase of a relatively small portion of the total NXP business.

Based upon the analysis of all relevant facts and circumstances, most notably the factors described above, the Company determined that the preponderance of such factors indicated that Trident was the acquiring entity.

The following is the consideration transferred by the Company representing the total purchase price:

	Shares		Amount
	(In thousands)
Issuance of Trident common shares to NXP		104,204,348	$	188,610
Issuance of Trident preferred shares to NXP		4		—
Purchase of Trident common shares by NXP				(30,000	)
Net cash payment by NXP				(14,235	)
Contingent returnable consideration(a)				(3,588	)
Acquisition date fair value of total consideration transferred			$	140,787

The final purchase price of $140.8 million was allocated to the net tangible and intangible assets acquired and liabilities assumed as follows:

	Amount
	(In thousands)
Assets acquired:
Cash	$	2,145
Prepaid expenses and other current assets		14,375
Inventory notes receivable(b)		39,900
Fixed assets(c)		10,487
Non-current assets		4,500
Service agreements(d)		16,000
Acquired intangible assets(e)		117,000
Deferred tax asset(f)		796
Liabilities assumed:
Accrued liabilities		(16,199	)
Non-current liabilities		(4,815	)
Fair market value of the net assets acquired		184,189
Gain on acquisition(g)		(43,402	)
Total purchase price	$	140,787

Under the purchase method of accounting, the total purchase price is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed in connection with the acquisition based on their fair value as of the closing date of the acquisition. Total acquisition related expenses incurred through March 31, 2010, recorded as operating expenses, were approximately $11.7 million. Assets acquired in the acquisition as of February 8, 2010 were reviewed and adjusted, if required, to their fair value.

The Company utilized a methodology referred to as the income approach, which discounts expected future cash flows to present value. The discount rate used in the present value calculations was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks.

Other NXP related items:

(a) Prior to the close of the acquisition, NXP initiated a restructuring plan pursuant to which the employment of some NXP employees was terminated upon the close of the acquisition. The Company has determined that the restructuring plan was a separate plan from the business combination because the plan to terminate the employment of certain employees was made in contemplation of the acquisition. Therefore, the full severance cost of $3.6 million was recognized by the Company as an expense on the acquisition close date. The entire severance cost was paid by NXP after the close of the acquisition, was reflected under applicable accounting guidance as contingent returnable consideration, effectively reducing the purchase consideration transferred.

(b) As of the effective date of the acquisition, the Company acquired two inventory notes receivable (the “Note” or “Notes”). The first Note was for $19.1 million and allowed the Company to purchase finished goods inventory on March 22, 2010. The second Note was for $20.8 million and allows the Company to purchase work-in-process inventory on the readiness of the Company’s enterprise resource planning system which is projected to be implemented in the first half of fiscal 2012, but no later than August 31, 2012. For additional details related to notes receivable, see Note 14, “Related Party Transactions,” of Notes to Condensed Consolidated Financial Statements.

(c) Fixed assets (property and equipment) were measured at fair value and could include assets that are not intended to be used in their highest and best use. The Company’s fixed assets were reduced by $1.4 million, resulting from new information received by the Company subsequent to filing the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2010.

(d) Service agreements acquired from NXP were measured at fair value and are amortized over the remaining life of the agreement, up to 33 months from the closing date of the transaction. These service agreements include manufacturing and distributor agreements as well as payroll processing, benefits administration, accounting, information technology and real estate administration.

(e) Identifiable intangible assets were measured at fair value and could include assets that are not intended to be used in their highest and best use. Developed technology consisted of products which have reached technological feasibility. The value of the developed technology was determined by using the discounted income approach.

Customer relationships relate to the Company’s ability to sell existing and future versions of products to existing NXP customers. The fair value of the customer relationships was determined by using the discounted income approach.

Patents represent various patents previously owned by NXP. The fair value of patents was determined by using the royalty relief method and estimating a benefit from owning the asset rather than paying a royalty to a third party for the use of the asset.

The backlog fair value represents the value of the standing orders for the products acquired in the acquisition as of the close of the acquisition.

The acquired intangible assets, their fair values and weighted average amortized lives, are as follows (dollars in thousands):

	Fair Value		Weighted Average Amortized Life
Backlog	$	15,000	0.5 years
Customer relationships		23,000	2.24 years
Developed technology		48,000	3.0 years
Patents		13,000	4.5 years
In-process research and development		18,000
	$	117,000

In-process research and development, or IPR&D, consisted of the in-process set-top box projects awaiting completion development at the time of the acquisition. The value assigned to IPR&D was determined by considering the importance of products under development to the overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. Acquired IPR&D assets were initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Efforts necessary to complete the in-process research and development include additional design, testing and feasibility analyses.

The values assigned to IPR&D were based upon discounted cash flows related to the future products’ projected income stream. The discount rate of 33.9% used in the present value calculations were derived from a weighted average cost of capital, adjusted upward to reflect the additional risks inherent in the development life cycle, including the useful life of the technology, profitability levels of the technology, and the uncertainty of technology advances that are known at the date of acquisition.

The following table summarizes the significant assumptions at the acquisition date underlying the valuations of IPR&D for the NXP acquisition completed on February 8, 2010:

	Fair Value		February 8, 2010
Set-Top Box Development Projects			Estimated Cost to Complete		Expected Commencement Date of Significant Cash Flows
	(In thousands)
Apollo/Shiner	$	8,856	$	1,400	Completed
Kronos		7,731		1,800	February 2012
Other		1,413		2,700	February 2013
Total	$	18,000	$	5,900

The Company received and sampled first silicon on the Apollo/Shiner product and in November 2010 determined that the project was complete. Minor validation and testing work will continue prior to achieving high volume production which is anticipated to occur in the fourth quarter of 2011. The asset was re-designated a finite-lived intangible asset within the core technology category and amortization of the asset commenced in November 2010 over an expected useful live of 3 years. The Company continues to develop the Kronos and other product lines with the expectation the products will be fully developed in 2012 and 2013, respectively.

NXP Related Tax Items:

(f) The Company’s deferred tax assets were reduced by $3.7 million, resulting from new information received by the Company subsequent to filing the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2010.

(g) The preliminary purchase price allocation, associated with the acquisition of the television systems and set-top box business lines from NXP, assigned $48.5 million to gain on acquisition. Subsequently, in accordance with applicable accounting guidance, the gain on acquisition was reduced by $5.1 million and the Company’s deferred tax assets and fixed assets were reduced by $3.7 million and $1.4 million, respectively, resulting from new information received by the Company subsequent to filing the Company’s Form 10-Q for the three months ended March 31, 2010.

The Company utilized the income approach to determine fair value of the assets. The key factor that led to the recognition of a gain on acquisition was a decline of $54.2 million in the fair value of the Company’s common stock purchase consideration between the date that the definitive agreement was signed on October 4, 2009 (based on a closing price of $2.33 per share) and the acquisition date of February 8, 2010 (based on a closing price of $1.81 per share), as determined in accordance with applicable accounting guidance.

Unaudited Pro Forma Financial Information

The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the acquisition of the television systems and set-top box business lines of NXP had occurred on January 1, 2010. This pro forma financial information is for informational purposes only and does not reflect any operating efficiencies or inefficiencies which may result from the business combination and therefore is not necessarily indicative of results that would have been achieved had the businesses been combined during the periods presented (amounts in thousands, except per share data):

	Nine Months  Ended September 30, 2010
Pro forma net revenues	$	486,038
Pro forma net loss		(73,034	)
Pro forma net loss per share — Basic		(0.46	)
Shares used in computing pro forma net loss per share — Basic		159,624

The Company recorded net revenues of approximately $302.7 million and net operating loss of $15.9 million from the acquisition for the nine months ended September 30, 2010 respectively.