NOTE 3—ACQUISITION

On June 25, 2012 (the "Acquisition Date"), pursuant to the terms of an Amended and Restated Agreement and Plan of Merger (the "Acquisition Agreement"), a wholly-owned subsidiary of the Company merged with and into eBioscience, with eBioscience surviving as a wholly-owned subsidiary of the Company (the "Acquisition"). eBioscience specializes in the development, manufacturing, marketing and distribution of research tools in the areas of flow cytometry, immunoassays, microscopic imaging and other protein-based analyses.

At the Acquisition Date, each share of eBioscience issued and outstanding common stock immediately prior to the Acquisition Date was cancelled and converted into the right to receive cash of $38.18 per each such previously issued and outstanding common share. Further, all options to purchase shares of eBioscience common stock that were outstanding immediately prior to the Acquisition Date became exercisable to the extent not fully vested and were cancelled and retired immediately prior to the Acquisition Date in exchange for cash of $38.18 per each such previously outstanding option, less the exercise price of such option.

The Acquisition was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the tangible and identifiable intangible assets and liabilities of eBioscience were recorded at their respective fair values as of the Acquisition Date, including an amount for goodwill representing the difference between the Acquisition consideration and the fair value of the identifiable net assets.

At June 30, 2012, the Company had provisionally estimated fair values for the assets acquired and liabilities assumed at the Acquisition Date. The amounts reported were considered provisional as the Company was completing the valuation work to determine the fair value of assets acquired and liabilities assumed and finalize the working capital adjustments as required by the Acquisition Agreement. With the help of third-party specialists, the valuation was finished during the fourth quarter of 2012 and the determination of the fair value of acquired inventory, property and equipment, and intangible assets was completed. In addition, the Company's review of tax accounts was also completed during the fourth quarter of 2012. This resulted in adjustments to the determination of the fair value of assets acquired and liabilities assumed (also referred to as "measurement period adjustments") to the accompanying Condensed Consolidated Financial Statements as of and for the six months ended June 30, 2012. Under US GAAP, changes to the fair value of the assets acquired and liabilities assumed during the measurement period are recognized as of the date of acquisition. The Company considers the fair value analysis to be final as of December 31, 2012.

The results of operations of the acquired eBioscience business and the fair values of the assets acquired and liabilities assumed have been included in the accompanying Consolidated Financial Statements since the Acquisition. For the year ended December 31, 2012, the Company recorded $37.0 million in revenue and recognized a net loss of $8.9 million from eBioscience.

Purchase price

The total purchase price for the Acquisition was $314.9 million, of which $8.3 million was accounted for as share-based compensation expense as a result of the accelerated vesting of certain eBioscience employee options immediately prior to the Acquisition and has been recognized in the accompanying Consolidated Statement of Operations under Selling, general and administrative expenses. The remaining $306.6 million was related to the fair value of the net assets acquired from eBioscience. The Acquisition was financed through a combination of cash on hand, the liquidation of available-for-sale securities, proceeds from third-party financing (the "Term Loan") and the issuance of 4.00% Convertible Senior Notes (the "4.00% Notes"). Refer to Note 13. "Long-Term Debt Obligations" for further information.

The following table summarizes the accounting treatment of the purchase price paid (in thousands):

	Before					After
	Adjustment					Adjustment
	of Final		Measurement			of Final
	Determination		Period			Determination
	of Fair Value		Adjustments			of Fair Value
Purchase consideration	$	306,841	$	(215	)	$	306,626
Share-based compensation expense		8,265		-			8,265
Total purchase price	$	315,106	$	(215	)	$	314,891

Fair value of assets acquired and liabilities assumed

The following table summarizes the fair values of assets acquired, liabilities assumed and goodwill (in thousands), as well as retrospective measurement period adjustments made during the year ended December 31, 2012:

	Before						After
	Adjustment						Adjustment
	of Final			Measurement			of Final
	Determination			Period			Determination
	of Fair Value(1)			Adjustments(2)			of Fair Value
Cash and cash equivalents	$	7,095		$	-		$	7,095
Accounts receivable, net		9,488			(8	)		9,480
Inventories		52,060			(1,380	)		50,680
Prepaid expenses and other assets		7,844			575			8,419
Property and equipment		5,969			551			6,520
Intangible assets		159,755			(22,155	)		137,600
Other non-current assets		1,769			(328	)		1,441
Identifiable assets acquired		243,980			(22,745	)		221,235
Accounts payable and accrued liabilities		(18,681	)		(2,691	)		(21,372	)
Deferred tax liability		(55,542	)		8,658			(46,884	)
Other non-current liabilities		(3,241	)		(225	)		(3,466	)
Identifiable liabilities acquired		(77,464	)		5,742			(71,722	)
Goodwill		140,325			16,788			157,113
Purchase consideration	$	306,841		$	(215	)	$	306,626

(1) As previously reported in the notes to the Condensed Consolidated Financial Statements included in the Company's Quarterly Report on Form 10-Q as of June 30, 2012 and for the three and six months then ended.

(2) During the second half of 2012, the Company finalized the valuations of the fair value of certain asset and liabilities included in the Acquisition resulting in the measurement period adjustments detailed above, including reducing the fair value of certain intangible assets by $22.2 million to better reflect market participant assumptions about the facts and circumstances existing as of the Acquisition Date.

The above change in domestic deferred tax liabilities resulted in a $7.6 million increase in the Company's domestic deferred tax asset valuation allowance. Adjustments to valuation allowances are further discussed in Note 16. "Income Taxes."

The above measurement period adjustments did not result from events that occurred after the Acquisition Date.

Inventories

The inventories acquired include an adjusted step-up in basis of approximately $29.0 million, which represents the fair value of the inventory less a reasonable profit margin on costs to complete and sell. The step-up in basis will be recognized as the inventory is sold, which is expected to be over a period of 12 to 23 months from the Acquisition Date.

Intangible Assets

The following table summarizes the fair value of definite-lived intangible assets acquired at the Acquisition Date and their estimated useful lives (in thousands, except for estimated useful lives):

				Estimated
	Fair Value			Useful Life
Purchased intangible assets:
Customer base		$	61,100	12 years
Developed technologies			58,000	12 years
Trademarks and tradenames			15,500	5 years
Other contractual agreements			3,000	2 years
Total		$	137,600

Purchased intangible assets were recorded at fair value determined using an income approach, which recognizes that the fair value of an asset is premised upon the expected receipt of future economic benefits such as earnings and cash inflows based on current sales projections and estimated direct costs. Indications of value are developed by discounting these benefits to their present worth at a discount rate that reflects the current return requirements of market participants.

Purchased intangible assets are finite-lived intangible assets and are being amortized over their estimated useful lives.

Deferred tax liabilities

Deferred tax liabilities assumed are primarily comprised of the tax impact of the temporary difference between the fair values of assets acquired and the historical tax basis of those assets. These temporary differences will reverse as the assets are amortized.

Goodwill

The excess of Acquisition consideration over the fair value of assets acquired and liabilities assumed represents goodwill. The Company believes the factors that contributed to goodwill include synergies that are specific to the Company's consolidated business, and not available to market participants, and the acquisition of a talented workforce that expands the Company's expertise in business development and the commercialization of cell and protein analysis products. The Company does not expect any portion of this goodwill to be deductible for tax purposes.

Liabilities

The above determination of fair value excludes amounts related to certain litigation in which eBioscience is currently involved. The Acquisition Agreement provides that eBioscience security holders shall, subject to certain limitations, indemnify Affymetrix against damages arising out of or resulting from intellectual property litigation brought against eBioscience by Life Technologies Corporation. The net assets acquired and results of operations do not reflect the outcome of this litigation, which was unable to be estimated at December 31, 2012. Under the terms of the Acquisition Agreement, $25.2 million of the purchase price was placed into escrow to secure eBioscience security holders' indemnification obligations to the Company. During January 2013, the litigation was settled and $2.3 million was reimbursed to the Company out of escrow.

Transaction costs

The Company cumulatively incurred approximately $9.1 million of Acquisition-related costs that are recognized as Selling, general and administrative expense in the accompanying Consolidated Statements of Operations, of which $6.2 million and $2.9 million was recognized during the years ended December 31, 2012 and 2011, respectively.

Total underwriting and financing fees of approximately $8.5 million associated with the Term Loan and 4.00% Notes were also incurred and are discussed in Note 13. "Long-Term Debt Obligations."

Share-based compensation costs

The share-based compensation expense of $8.3 million recognized for the accelerated vesting of certain eBioscience options immediately vested prior to the Acquisition was recognized in the accompanying Consolidated Statements of Operations as Selling, general and administrative expense in during the year ended December 31, 2012.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations for the years ended December 31, 2012 and 2011 as if the Acquisition had been completed on January 1, 2011, with adjustments to give effect to pro forma events that are directly attributable to the Acquisition. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the consolidation of the operations of the Company and eBioscience. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the Acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations (in thousands, except per share data):

	Years Ended December 31,
	2012			2011
Revenue	$	331,370		$	338,416
Net loss		(35,500	)		(24,529	)
Basic and diluted net loss per share		(0.50	)		(0.35	)

The unaudited pro forma financial information exclude non-recurring share-based compensation expense of $8.3 million recognized for the accelerated vesting of certain eBioscience stock options immediately prior to the Acquisition, and an income tax benefit of $37.1 million for the years ended December 31, 2012 and 2011.

The unaudited pro forma financial information for the year ended December 31, 2012 exclude non-recurring Acquisition-related transaction costs incurred by the Company of $6.2 million and by eBioscience of $5.5 million. For the year ended December 31, 2011, excluded non-recurring Acquisition costs incurred by the Company was $2.9 million and by eBioscience was $0.6 million.