Note 2. Business Acquisitions and License Agreement

Broadcom Corporation

In March 2014, the Company acquired certain 10/40/100Gb Ethernet controller-related assets from Broadcom Corporation (Broadcom) primarily relating to the NetXtreme^® II Ethernet controller family and licensed certain related intellectual property under non-exclusive licenses for total cash consideration of $147.8 million and the assumption of certain liabilities. This business acquisition expanded the Company’s product portfolio and is expected to accelerate its time to market for next generation products in the server Ethernet connectivity market. In connection with this acquisition, the Company entered into a development and supply agreement under which the Company will purchase services and ASICs from Broadcom related to this business.

During fiscal 2014, the Company preliminarily estimated the fair value of the assets acquired and liabilities assumed and allocated a portion of the total purchase consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values at the acquisition date. During fiscal 2015, the Company completed the final assessment of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed, including the developed technology, IPR&D and customer relationship intangible assets, resulting in an increase in identifiable intangible assets acquired of $25.3 million with a corresponding decrease in goodwill. Also during fiscal 2015, the Company completed the identification and valuation of certain acquired property and equipment and completed the transfer of property and equipment in a foreign jurisdiction that was subject to local compliance requirements, resulting in a total increase in property and equipment of $1.6 million with a corresponding decrease in goodwill. The Company’s consolidated balance sheet as of March 30, 2014 has been revised to retroactively reflect the final allocation of the purchase price. The excess of the total purchase consideration over the aggregate estimated fair value of the net assets acquired was recorded as goodwill. The goodwill associated with this acquisition is expected to be tax deductible. The following table summarizes the final allocation of the purchase price to the fair value of the assets acquired and liabilities assumed:


	(In thousands)
Inventories	$	2,880
Other current assets		307
Property and equipment		4,070
Goodwill		56,256
Identifiable intangible assets		85,360
Accrued compensation		(987	)
Other current liabilities		(129	)

	$	147,757

A summary of the identifiable intangible assets acquired as part of the acquisition and their respective estimated useful lives is as follows:


	Weighted Average Useful Lives		Amount
	(Years)		(In thousands)
Identifiable Intangible Assets:
Developed technology		5	$	58,760
In-process research and development		N/A		21,200
Customer relationships		8		5,400

			$	85,360

The Company believes the amounts recorded as developed technology, IPR&D and customer relationships represent the fair value of these identifiable intangible assets as of the acquisition date. These assets are measured at fair value on a nonrecurring basis and are categorized as Level 3 due to the use of significant unobservable inputs in the valuation.

The fair values of the identifiable intangible assets related to this acquisition were determined using the income approach. Under the income approach, expected future cash flows are estimated and discounted to their net present value at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted average cost of capital and the return on assets. For technology-related intangible assets, such as developed technology and IPR&D, additional factors considered include the risks inherent in the development process, the likelihood of achieving technological success and market acceptance. For IPR&D, the project is further analyzed to determine the unique technological innovations, the reliance on developed technology, if any, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows related to these identifiable intangible assets were estimated based on forecasted revenue and costs, taking into consideration expected product life cycles, market penetration and growth rates. The Company used risk adjusted discount rates of between 14.5% and 17.0% to discount the expected future cash flows under the income approach.

The IPR&D project is related to next generation 40/100Gb Ethernet products. As of the acquisition date, the Company estimated that the project was 40% complete, had an estimated remaining cost to complete of $6 million and an estimated remaining time to complete of two years. The progress to date on this IPR&D project has been consistent with the Company’s expectations at the time of the acquisition.

Supplemental Pro Forma Data (Unaudited)

The unaudited supplemental pro forma financial data presented below gives effect to this acquisition as if it had occurred at the beginning of fiscal 2013. The supplemental data includes amortization expense related to the acquired intangible assets of $12.0 million in each of the periods presented. In addition, the supplemental data reflects adjustments related to stock-based compensation, the amortization of acquired inventory valuation step-up and transaction costs, such as legal fees, directly associated with the acquisition. These additional adjustments are not material to the periods presented.

This unaudited supplemental pro forma financial data is presented for informational purposes only and does not purport to be indicative of the results of future operations or the results that would have occurred had the Company completed the acquisition at the beginning of fiscal 2013.


	2014			2013
	(Unaudited, in thousands, except per share amounts)
Pro forma net revenues:
Advanced Connectivity Platforms	$	423,446		$	433,357
Legacy Connectivity Products		85,888			124,424

	$	509,334		$	557,781
Pro forma income (loss) from continuing operations	$	(38,676	)	$	59,198
Pro forma income (loss) from continuing operations per share (basic)	$	(0.44	)	$	0.63
Pro forma income (loss) from continuing operations per share (diluted)	$	(0.44	)	$	0.63

Patent License Agreement

In March 2014, the Company entered into a non-exclusive patent license agreement with Broadcom and paid a one-time fee of $62.0 million as specified in the agreement. The license covers all of the Company’s Fibre Channel products. The Company determined that the $62.0 million fee represented the estimated fair value of the license utilizing a market approach, as well as a relief-from-royalty income approach based on the applicable historical revenues and projected future revenues over the ten-year term of the license. Based on the relief-from-royalty income approach, the Company attributed $41.0 million of the license fee to the use of the related technology in periods prior to the date of the license agreement and recorded this amount in special charges in fiscal 2014. The portion of the fee attributed to the future use of the technology was $21.0 million and was recorded as a prepaid license in other assets. The prepaid license is being amortized using a method that reflects the pattern in which the economic benefits of the prepaid license are consumed or otherwise used over the ten-year license term.

Multiple Element Arrangement

The Company accounted for the acquisition of the Ethernet controller-related assets (which included a development and supply agreement and a transition services agreement) and the patent license agreement as a multiple element arrangement, since these agreements were entered into between the parties within a short period of time. In a multiple element arrangement, the fair value of the individual components is determined and the total consideration is allocated to the components on a relative fair value basis. The Company determined that the fair value of each of the acquisition and the patent license were consistent with the consideration specified in the respective agreements.

Brocade Communications Systems, Inc.

In January 2014, the Company acquired certain assets related to the Fibre Channel and converged network adapter business from Brocade Communications Systems, Inc. for cash consideration of $9.6 million and the assumption of certain liabilities. The Company completed this acquisition to expand its product portfolio and market position in the Fibre Channel and converged network adapter market. The Company estimated the fair value of the assets acquired and liabilities assumed and allocated the total purchase consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values at the acquisition date. The primary components of the purchase price allocation are an intangible asset of $8.0 million, consisting of developed technology, and inventory of $1.7 million. The intangible asset is being amortized over an estimated useful life of approximately four years using a method that reflects the pattern in which the economic benefits of the intangible asset are realized.

The results of operations for this acquisition have been included in the consolidated financial statements from the date of acquisition and are immaterial to the consolidated financial results of the Company. Pro forma results of operations have not been presented for this acquisition as the results of operations of the acquired business are not material to the consolidated financial statements of the Company.