| Acquisitions | 6. Acquisitions
Bear Data Solutions, Inc.
On October 18, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bear Data. Bear Data is primarily an IT services firm, serving California-based and international customers from offices in San Francisco, San Jose, Irvine and San Diego. A significant portion of its revenues is derived from networking products including Cisco wireless, routing and core switches. The aggregate purchase price for the overall transaction was approximately $13.4 million, including a cash payment of $12.7 million, net of cash acquired, in connection with the merger (the “Preliminary Purchase Price”), which was partially offset by a net working capital receivable from the sellers of $741,000 resulting from the preliminary estimated net tangible asset adjustment as defined by the Merger Agreement. The Preliminary Purchase Price was subject to certain adjustments to reflect the difference, if any, between the net working capital at closing and target net working capital. An aggregate amount of $2.4 million of the Preliminary Purchase Price was placed into escrow to cover any post-closing adjustment to the Preliminary Purchase Price and indemnification obligations of the securityholders. Pursuant to the Merger Agreement, the sellers of Bear Data were obligated to pay us an amount equal to the difference between the actual net tangible assets on the closing date and the sellers’ good faith estimate of net tangible assets as set forth in the Merger Agreement.
The Company entered into a Common Stock Purchase Agreement (the “Common Stock Purchase Agreement”), also dated as of October 18, 2014, by and among Datalink Corporation, Merger Sub, and three executive securityholders of Bear Data. Under the Common Stock Purchase Agreement, the Company issued 156,360 shares of its common stock with a value of approximately $1.5 million, net of illiquidity adjustments, to the three Bear Data executives. The $13.4 million aggregate purchase price for the overall transaction discussed above includes the $1.5 million issuance of shares to the executive securityholders of Bear Data. For this purpose, the Company’s common stock was valued at the volume-weighted average of the per share trading prices of its common stock as reported through Bloomberg (based on all trades in the Company’s common stock and not an average of daily averages) for the 20 consecutive full trading days ending one business day prior to closing. These shares had an aggregate value of $1.7 million, offset by a $192,000 illiquidity adjustment. 75% of the shares issued under the Common Stock Purchase Agreement were not transferable until the first anniversary of closing.
Under the acquisition method of accounting, the Company estimated the fair value of the assets acquired and liabilities assumed of Bear Data primarily using a discounted cash flow approach with respect to identified intangible assets and goodwill. The Company based this approach upon its estimates of future cash flows from the acquired assets and liabilities and utilized a discount rate consistent with the inherent risk associated with the acquired assets and liabilities assumed. As of December 31, 2014, the fair value of the acquired assets was provisional as the Company had not yet finalized net working capital adjustments. The total purchase price has been allocated to Bear Data’s net tangible and identifiable assets based on their estimated fair values as of October 18, 2014, and has been adjusted through September 30, 2015. Adjustments to provisional amounts during the measurement period that were the result of information that existed as of the acquisition date require the revision of comparative prior period financial information when reissued in subsequent financial statements. Accordingly, our 2014 consolidated balance sheet has been retroactively adjusted to account for those changes.
Bear Data filed its final stub period federal and state income tax returns for 2014 during the three months ended September 30, 2015. The final stub period returns reported taxable losses, which have been carried back to the full extent possible. As a result, the Company recorded a $916,000 reduction in goodwill and increase in net deferred tax assets. The changes did not impact the Company’s consolidated statements of operations.
The following table summarizes the final allocation of the purchase price including measurement period adjustments:
(in thousands)
Assets acquired at their fair value:
Accounts receivable, net
$
Inventories shipped but not installed
Short term deferred tax assets
Equipment
Finite-lived intangibles
Goodwill
Other assets
Total assets acquired
Liabilities assumed at their fair value:
Accounts payable
Leases payable
Accrued expenses
Long-term deferred tax liabilities
Total liabilities assumed
Net purchase price
$
The $9.5 million of finite-lived intangibles consisted of $370,000 of covenants not to compete, $890,000 of trademarks, $7,810,000 of customer relationships and $452,000 of order backlog having estimated lives of three years, three years, six years, and six months, respectively. The indefinite-lived asset consisted of goodwill of approximately $9.3 million, which was not deductible for tax purposes. The Company is amortizing the covenants not to compete, trademarks, and order backlog using the straight line method. The Company is amortizing the customer relationships it acquired in the Bear Data acquisition over its useful life using an accelerated amortization method, to match the pattern in which the economic benefits of that asset are expected to be consumed.
The following table provides a reconciliation of the net purchase price for Bear Data as compared to the cash payment for purchase:
(in thousands)
Payment in cash for purchase
$
Less cash acquired
)
Less receivable due from Seller
)
Plus value of shares issued
Net purchase price
$
Integration costs for 2015 include salaries, benefits and retention bonuses of exiting employees, some of whom assisted with the initial integration of Bear Data. In addition, transaction costs for 2015 include legal, audit, and other outside service fees necessary to complete the Company’s acquisition of Bear Data, which were expensed. Total integration and transaction costs were $419,000 and $939,000 for the three and nine months ended September 30, 2015, respectively.
Strategic Technologies, Inc.
On October 4, 2012, the Company purchased substantially all of the assets and liabilities of Strategic Technologies, Inc. (“StraTech”) from StraTech and Midas Medici Group Holdings, Inc. (“Midas,” parent company of StraTech and, together with StraTech, the “Sellers of StraTech”). StraTech is an IT services and solutions firm that shares the Company’s focus on optimizing enterprise data centers and IT infrastructure through a common product and services portfolio designed to help customers increase business agility. The Company purchased StraTech for a purchase price of approximately $11.9 million, comprised of a cash payment of approximately $13.2 million, which was offset by a receivable due from the Sellers of StraTech of approximately $3.3 million, resulting from the preliminary net tangible asset adjustment as defined by the asset purchase agreement. In addition, the Company issued 269,783 shares of its common stock with a value of approximately $2.0 million. Of those shares, 242,805 shares were deposited in an escrow account as security for certain indemnification obligations of the Sellers of StraTech.
Pursuant to the asset purchase agreement, the Sellers of StraTech were obligated to pay the Company an amount equal to the difference between the actual net tangible assets on the closing date and the Sellers’ good faith estimated net tangible assets as set forth in the asset purchase agreement. The Company initially recorded a receivable due from the Sellers of StraTech of approximately $4.2 million related to this payment at the acquisition date. The Sellers of StraTech provided us with a “Notice of Disagreement,” which stated that they disputed the amount owed to the Company in connection with this reconciliation payment. The asset purchase agreement contained an arbitration provision for disputes over the value of net tangible assets. During the measurement period (up to one year from the acquisition date), the final net tangible asset adjustment was agreed to and the net effect was a decrease in the receivable due from the Sellers of StraTech of $936,000 and an increase in the purchase price for the same amount as reflected above.
In January 2014, the Company reached a settlement agreement with the former owners of StraTech regarding the disputed amount owed to the Company in connection with the reconciliation payment mentioned above. Under the terms of the agreement, the former owners of StraTech agreed to release the entire 242,805 shares of Datalink common stock that were being held in escrow in exchange for a payment of $100,000 and the release of certain other claims. As of December 31, 2013, the remaining $3.3 million receivable due from the Sellers of StraTech was deemed to be uncollectible and written down to the estimated realizable value, which was determined to be the fair value of the shares in escrow on December 31, 2013. The remaining receivable of $2,647,000 was reclassified from accounts receivable to equity within the December 31, 2013 consolidated balance sheet. Based on the value of the Company’s common stock on the date of the settlement agreement in January 2014, the Company recorded a gain before tax of approximately $876,000 during the first six months of 2014 as a result of the increase in the Company’s stock price from December 31, 2013 to the date it repossessed the shares in escrow.
In connection with this acquisition, the Company allocated the total purchase consideration to the net assets acquired, including finite-lived intangible assets, based in their respective fair values at the acquisition date. The total purchase price paid for StraTech was approximately $11.9 million, of which approximately $5.3 million was allocated to goodwill, $15.9 million to identifiable intangible assets, and $9.3 million to net tangible liabilities. The finite-lived intangible, which consisted of customer relationships, has an estimated life of five years. The Company is amortizing the finite-lived intangible asset it acquired in the StraTech acquisition over its useful life using an accelerated amortization method, to match the pattern in which the economic benefits of that asset are expected to be consumed. The Company may deduct the goodwill for tax purposes over a 15-year period. |
