Business Combinations | Business Combinations Krux In November 2016, the Company acquired the outstanding stock of Krux Digital, Inc. (“Krux”), for consideration consisting of cash, common stock, and equity awards assumed. Krux is a leading data management platform that unifies, segments and activates audiences to increase engagement with users, prospects and customers. The Company has included the financial results of Krux in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material. The preliminary acquisition date fair value consideration transferred for Krux was approximately $741.8 million , which consisted of the following (in thousands, except for share data): Fair Value Cash $ 367,995 Common stock (4,210,773 shares) 317,703 Fair value of stock options and restricted stock awards assumed 56,068 Total $ 741,766 The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.2 was applied to convert Krux's outstanding equity awards for Krux's common stock into equity awards for shares of the Company's common stock. The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands): Fair Value Cash and cash equivalents $ 17,883 Other current and noncurrent tangible assets 12,418 Intangible assets 86,000 Goodwill 642,489 Deferred revenue, current and noncurrent (7,037 ) Other liabilities, current and noncurrent (9,308 ) Deferred tax liability (679 ) Net assets acquired $ 741,766 The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable, deferred taxes, and certain identifiable intangible assets, may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition. Fair Value Useful Life Developed technology $ 75,000 3 years Customer relationships 10,000 9 years Other intangibles 1,000 2 years Total intangible assets subject to amortization $ 86,000 The amount recorded for developed technology represents the estimated fair value of Krux’s data management platform technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with Krux customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Krux's technology with the Company's other offerings. The goodwill balance is not deductible for U.S. income tax purposes. The Company assumed equity awards for shares of Krux's common stock with a fair value of $104.4 million , of which $56.1 million was allocated to the consideration transferred. BeyondCore In September 2016, the Company acquired the outstanding stock of BeyondCore, Inc. (“BeyondCore”), for consideration consisting of cash, common stock, and equity awards assumed. BeyondCore is a smart data discovery technology company that automatically explores millions of variable combinations from structured data sources. The Company has included the financial results of BeyondCore in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material. The acquisition date fair value consideration transferred for BeyondCore was approximately $106.6 million , which consisted of the following (in thousands, except for share data): Fair Value Cash $ 21,053 Common stock (1,073,432 shares) 81,484 Fair value of stock options and restricted stock awards assumed 4,061 Total $ 106,598 The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.0464 was applied to convert BeyondCore's outstanding equity awards for BeyondCore's common stock into equity awards for shares of the Company's common stock. The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands): Fair Value Cash and cash equivalents $ 2,046 Other current and noncurrent tangible assets 462 Intangible assets 15,600 Goodwill 90,794 Deferred revenue, current and noncurrent (818 ) Other liabilities, current and noncurrent (923 ) Deferred tax liability (563 ) Net assets acquired $ 106,598 The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition. Fair Value Useful Life Developed technology $ 14,900 6 years Customer relationships 700 2 years Total intangible assets subject to amortization $ 15,600 The amount recorded for developed technology represents the estimated fair value of BeyondCore's smart data analytics technology. The amount recorded for customer relationships represents the fair values of the underlying relationships with BeyondCore customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating BeyondCore's technology with the Company's other offerings. The goodwill balance is not deductible for U.S. income tax purposes. The Company assumed equity awards for shares of BeyondCore's common stock with a fair value of $8.6 million , of which $4.1 million was allocated to the consideration transferred. Quip In August 2016, the Company acquired the outstanding stock of Quip, Inc. (“Quip”) for consideration consisting of cash, common stock, fair value of equity awards assumed, as well as fair value of the Company's pre-existing relationship. Quip combines content and communication to create living documents to allow work-teams to write, edit and discuss documents, spreadsheets and checklists in a single experience. The Company acquired Quip for its product offerings and employees. The Company has included the financial results of Quip in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material. The acquisition date fair value consideration transferred for Quip was approximately $412.0 million , which consisted of the following (in thousands, except for share data): Fair Value Cash $ 2,711 Common stock (4,796,152 shares) 385,131 Fair value of stock options and restricted stock awards assumed 22,345 Fair value of pre-existing relationship 1,833 Total $ 412,020 The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.5514 was applied to convert Quip's outstanding equity awards for Quip's common stock into equity awards for shares of the Company's common stock. The Company had a $1.0 million , or approximately 0.3 percent , noncontrolling equity investment in Quip prior to the acquisition. The acquisition date fair value of the Company's previously held equity interest was approximately $1.8 million and is included in the measurement of the consideration transferred. The Company recognized a gain of approximately $0.8 million as a result of remeasuring its prior equity interest in Quip held before the business combination. The gain is included in gains from acquisitions of strategic investments in the consolidated statement of operations. The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands): Fair Value Cash and cash equivalents $ 27,985 Other current and noncurrent tangible assets 556 Intangible assets 31,200 Goodwill 357,610 Other liabilities, current and noncurrent (2,491 ) Deferred tax liability (2,840 ) Net assets acquired $ 412,020 The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition. Fair Value Useful Life Developed technology $ 18,590 5 years Customer relationships 12,460 10 years Other purchased intangible assets 150 3 years Total intangible assets subject to amortization $ 31,200 The amount recorded for developed technology represents the estimated fair value of Quip's productivity technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with Quip customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Quip's technology with the Company's other offerings. The goodwill balance is not deductible for U.S. income tax purposes. The Company assumed equity awards for shares of Quip's common stock with a fair value of $68.0 million , of which $22.3 million was allocated to the consideration transferred. Demandware In July 2016, the Company acquired for cash the outstanding stock of Demandware, Inc. (“Demandware”), an industry-leading provider of enterprise cloud commerce solutions in the digital commerce market. The Company acquired Demandware to, among other things, expand the Company's position in customer relationship management and to pursue the digital commerce market with the new Salesforce Commerce Cloud. The Company has included the financial results of Demandware in the consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were $15.5 million and are recorded in general and administrative expense. The acquisition date fair value of the consideration transferred for Demandware was approximately $2.9 billion , including the proceeds from the term loan of $500.0 million (see Note 8), which consisted of the following (in thousands): Fair Value Cash $ 2,920,336 Fair value of stock options and restricted stock awards assumed 9,344 Total $ 2,929,680 The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.9545 was applied to convert Demandware’s outstanding equity awards for Demandware’s common stock into equity awards for shares of the Company’s common stock. The following table summarizes the preliminary estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands): Fair Value Cash and cash equivalents $ 139,259 Marketable securities 37,230 Accounts receivable 56,982 Other current assets 13,545 Customer contract asset, noncurrent 327,830 Intangible assets 633,277 Property and equipment 29,463 Other noncurrent assets 4,579 Goodwill 1,985,269 Accounts payable, accrued expenses and other liabilities (51,870 ) Deferred revenue, current and noncurrent (22,647 ) Other liabilities, noncurrent (12,935 ) Deferred tax liability (210,302 ) Net assets acquired $ 2,929,680 The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, specifically, the current and noncurrent income taxes payable and deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. During fiscal 2017, and subsequent to the initial purchase accounting, the Company identified additional information that existed as of the date of the acquisition related to the valuation of the customer relationship assets and therefore adjusted the measurement of the fair value of these assets. As a result of the updated valuation, the Company recorded measurement period adjustments, which included a decrease to the fair value of the customer relationship asset of $168.8 million . Additionally, these measurement period adjustments resulted in a corresponding decrease to the deferred tax liability recognized of $61.2 million . The net effect of these changes resulted in a corresponding increase to goodwill of $100.4 million . These adjustments are reflected in the table above. The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands): Fair Value Useful Life Developed technology $ 242,550 2 to 5 years Customer relationships 384,590 3 to 10 years Other purchased intangible assets 6,137 3 to 10 years Total intangible assets subject to amortization $ 633,277 Developed technology represents the fair value of Demandware’s e-commerce technology. Customer relationships represent the fair values of the underlying relationships with Demandware customers. Other purchased intangible assets also includes intangibles such as trademarks and favorable leases, which span over lease terms varying from 1 to 10 years. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Demandware’s e-commerce technology with the Company’s other offerings. The majority of the goodwill balance is not deductible for U.S. income tax purposes. The Company assumed equity awards with an estimated fair value of $135.2 million , of which $9.3 million was allocated to the purchase consideration. The Demandware acquisition was significant to our consolidated financial statements and their results are included in the consolidated financial statements from the date of acquisition. The amounts of revenue and earnings of Demandware included in the Company’s consolidated statement of operations from the acquisition date of July 11, 2016 through January 31, 2017 are as follows (in thousands): Total revenues $ 120,383 Pretax loss (102,524 ) Net loss (103,149 ) SteelBrick In February 2016, the Company acquired the outstanding stock of SteelBrick, Inc. (“SteelBrick”) for consideration consisting of cash and common stock. SteelBrick is a next generation quote-to-cash platform, delivered 100 percent natively on the Salesforce platform, which offers applications, or apps, for automating the entire deal close process - from generating quotes and configuring orders to collecting cash. The Company has included the financial results of SteelBrick in the consolidated financial statements from the date of acquisition, which have not been material to date. The transaction costs associated with the acquisition were not material. The acquisition date fair value consideration transferred for SteelBrick was approximately $314.8 million , which consisted of the following (in thousands, except for share data): Fair Value Cash $ 1,698 Common stock (4,288,447 shares) 278,372 Fair value of stock options and restricted stock awards assumed 10,989 Fair value of pre-existing relationship 23,726 Total $ 314,785 The fair value of stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.08 was applied to convert SteelBrick's outstanding equity awards for SteelBrick's common stock into equity awards for shares of the Company's common stock. The Company had a $13.9 million , or approximately six percent, noncontrolling equity investment in SteelBrick prior to the acquisition. The acquisition date fair value of the Company's previously held equity interest was approximately $23.7 million and is included in the measurement of the consideration transferred. The Company recognized a gain of approximately $9.8 million as a result of remeasuring its prior equity interest in SteelBrick held before the business combination. The gain is included in gains from acquisitions of strategic investments on the Consolidated Statement of Operations. The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands): Fair Value Cash and cash equivalents $ 59,296 Other current and noncurrent tangible assets 3,012 Customer contract asset, noncurrent 6,954 Intangible assets 49,160 Goodwill 217,986 Deferred revenue, current and noncurrent (8,479 ) Other liabilities, current and noncurrent (2,665 ) Deferred tax liability (10,479 ) Net assets acquired $ 314,785 The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management's estimates and assumptions. The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives as of the date of acquisition. Fair Value Useful Life Developed technology $ 30,700 4 years Customer relationships 17,110 7 years Other purchased intangible assets 1,350 1 year Total intangible assets subject to amortization $ 49,160 The amount recorded for developed technology represents the estimated fair value of SteelBrick's quote-to-cash and billing technology. The amount recorded for customer relationships represents the fair values of the underlying relationship with SteelBrick customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating SteelBrick's quote-to-cash technology with the Company's other offerings. The majority of the goodwill balance is not deductible for U.S. income tax purposes. The Company assumed equity awards for shares of SteelBrick's common stock with a fair value of $39.6 million , of which $11.0 million was allocated to the consideration transferred. MetaMind In April 2016, the Company acquired MetaMind, Inc. (“MetaMind”) for approximately $32.8 million in cash, net of cash acquired. This amount includes amounts to be paid after an initial holdback period, and assumed equity awards. The primary reason for the acquisition was to extend the Company's intelligence in natural language processing and image recognition across all clouds. The Company has included the financial results of MetaMind, which have not been material to date, in its consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were not material. In allocating the purchase consideration for MetaMind based on estimated fair values, the Company recorded $31.2 million of goodwill and $1.9 million of identifiable intangible assets. The goodwill balance is not deductible for U.S. income tax purposes. The estimated fair values of assets acquired and liabilities assumed, specifically current and noncurrent income taxes payable and deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. Thus, the provisional measurements of fair value are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. The Company assumed equity awards for shares of MetaMind's common stock with a fair value of $5.5 million , of which $0.5 million was allocated to the purchase consideration. The Company's chairman, who held a greater than ten percent ownership interest in MetaMind, received approximately $6.0 million in total proceeds, subject to customary escrow amounts, in connection with this acquisition. Other Fiscal 2017 Business Combinations During fiscal 2017 , the Company acquired seven other companies for an aggregate of $108.7 million in cash, net of cash acquired, and has included the financial results of these companies in its consolidated financial statements from the respective dates of acquisition. These transactions, individually and in the aggregate, are not material to the Company. The costs associated with these acquisitions were not material. The Company accounted for these transactions as business combinations. In allocating the purchase consideration for each company based on estimated fair values, the Company recorded $108.2 million of goodwill and $34.2 million of identifiable intangible assets. Amounts allocated to the remaining acquired tangible assets and liabilities were not material. The majority of the goodwill balance associated with these transactions is not deductible for U.S. income tax purposes. The Company expects to finalize the valuations as soon as practicable, but not later than one year from the acquisition dates. Fiscal Year 2016 50 Fremont In February 2015, the Company acquired 50 Fremont Street, a 41 -story building totaling approximately 817,000 rentable square feet located in San Francisco, California (“50 Fremont”). At the time of the acquisition, the Company was leasing approximately 500,000 square feet of the available space in 50 Fremont. The Company acquired 50 Fremont for the purpose of expanding its global headquarters in San Francisco. Pursuant to the acquisition agreement, the Company also acquired existing third-party leases and other intangible property, terminated the Company’s existing office leases with the seller and assumed the seller's outstanding loan on 50 Fremont. In accordance with Accounting Standards Codification 805 (“ASC 805”), Business Combinations, the Company accounted for the building purchase as a business combination. The purchase consideration for the corporate headquarters building was as follows (in thousands): Fair Value Cash $ 435,189 Loan assumed on 50 Fremont 200,000 Prorations due to ownership transfer midmonth 2,411 Total purchase consideration $ 637,600 The following table summarizes the fair values of net tangible and intangible assets acquired (in thousands): Fair Value Building $ 435,390 Land 183,888 Termination of salesforce operating lease 9,483 Acquired lease intangibles 7,590 Loan assumed on 50 Fremont fair market value adjustment 1,249 Total $ 637,600 To fund the purchase of 50 Fremont, the Company used $115.0 million of restricted cash that the Company had on the balance sheet as of January 31, 2015. In connection with the purchase, the Company recognized a net non-cash gain totaling approximately $36.6 million on the termination of the lease signed in January 2012. This amount reflects a gain of $46.1 million for the reversal of tenant incentives provided from the previous landlord at the inception of the lease and a loss of $9.5 million related to the termination of the Company's operating lease. The tax impact as a result of the difference between tax and book basis of the building is insignificant after considering the impact of the Company's valuation allowance. The amounts above have been included in the Company's consolidated statements of operations and consolidated balance sheet. The Company has included the rental income from third party leases with other tenants in the building, and the proportionate share of building expenses for those leases in other expense in the Company's consolidated results of operations from the date of acquisition. These amounts are recorded in other expense as this net rental income is not part of our core operations. These amounts were not material for the periods presented. Other Fiscal 2016 Business Combinations During fiscal 2016 , the Company acquired several companies for an aggregate of $60.1 million in cash, net of cash acquired, and has included the financial results of these companies in its consolidated financial statements from the respective dates of acquisition. These transactions, individually and in aggregate, are not material to the Company. The costs associated with these acquisitions were not material. The Company accounted for these transactions as business combinations. In allocating the purchase consideration for each company based on estimated fair values, the Company recorded $68.7 million of goodwill. Some of the goodwill balance associated with these transactions is deductible for U.S. income tax purposes. Unaudited Pro Forma Results of Acquirees The Company has included the financial results of each of the acquirees in the consolidated financial statements from the respective dates of acquisition; the revenues and the results of each of the acquirees, except for Demandware, have not been material both individually or in the aggregate to the Company's fiscal 2017 and 2016 results. The following unaudited pro forma financial information summarizes the combined results of operations for the Company, Demandware and other acquisitions, as though the companies were combined as of the beginning of the Company’s fiscal 2016. The unaudited pro forma financial information was as follows (in thousands): Fiscal Year Ended January 31, 2017 2016 Total revenues $ 8,470,154 $ 6,813,535 Pretax loss (167,950 ) (362,882 ) Net loss (239,169 ) (212,342 ) The pro forma financial information for all periods presented has been calculated after adjusting the results of Demandware and other acquisitions to reflect the business combination accounting effects resulting from these acquisitions including the amortization expense from acquired intangible assets and the stock-based compensation expense for unvested stock options and restricted stock awards assumed as though the acquisition occurred as of the beginning of the Company’s fiscal year 2016. The historical financial information has been adjusted to give effect to pro forma events that are directly attributable to the business combinations and factually supportable. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of the Company’s fiscal 2016. The pro forma financial information for fiscal 2017 and 2016 combines the historical results of the Company, the adjusted historical results of Demandware and other acquisitions for fiscal 2017 and 2016, due to differences in reporting periods and considering the date the Company acquired Demandware and other acquisitions, and the effects of the pro forma adjustments described above. |