| Acquisitions | Note 6. Acquisitions
Acquisition of Bridge Interactive Group
In July 2016, Zillow, Inc., Bridge Interactive Group, LLC, a
Georgia limited liability company (“Bridge
Interactive”), each of the members of Bridge Interactive, and
an individual acting as the seller representative, entered into a
Securities Purchase Agreement pursuant to which Zillow, Inc.
acquired all of the outstanding ownership interests of Bridge
Interactive on August 1, 2016. Bridge Interactive is a creator
of broker and multiple listing service (MLS) back-office software.
Our acquisition of Bridge Interactive has been accounted for as a
business combination, and assets acquired and liabilities assumed
were recorded at their estimated fair values as of August 1,
2016.
Acquisition-related costs incurred, which primarily included legal
and accounting fees and other external costs directly related to
the acquisition, were expensed as incurred and were not
material.
The results of operations related to the acquisition of Bridge
Interactive have been included in our condensed consolidated
financial statements since the date of acquisition, and are not
significant. Pro forma financial information for the acquisition
accounted for as a business combination has not been presented, as
the effects were not material to our condensed consolidated
financial statements.
Acquisition of Naked Apartments
In February 2016, Zillow, Inc., Nectarine Merger Sub, Inc., a
Delaware corporation and wholly owned subsidiary of Zillow, Inc.
(“Merger Sub”), Naked Apartments, Inc., a Delaware
corporation (“Naked Apartments”), and an individual
acting as the stockholder representative, entered into an Agreement
and Plan of Merger (the “Naked Apartments Merger
Agreement”), pursuant to which Zillow, Inc. acquired Naked
Apartments on February 22, 2016 for approximately $13.2
million in cash. Under the terms and subject to the conditions of
the Naked Apartments Merger Agreement, Merger Sub merged with and
into Naked Apartments, with Naked Apartments remaining as the
surviving company and a wholly owned subsidiary of Zillow, Inc.
Naked Apartments is New York City’s largest rentals-only
platform.
Our acquisition of Naked Apartments has been accounted for as a
business combination, and assets acquired and liabilities assumed
were recorded at their estimated fair values as of
February 22, 2016. Goodwill, which represents the expected
synergies from combining the acquired assets and the operations of
the acquirer, as well as intangible assets that do not qualify for
separate recognition, is measured as of the acquisition date as the
excess of consideration transferred, which is also measured at fair
value, and the net of the fair values of the assets acquired and
the liabilities assumed as of the acquisition date.
The total purchase price has been allocated to the assets acquired
and liabilities assumed, including identifiable intangible assets,
based on their respective fair values at the acquisition date.
Based upon the fair values determined by us, in which we considered
or relied in part upon a valuation report of a third-party expert,
the total purchase price was allocated as follows (in
thousands):
Current assets $ 371
Identifiable intangible assets 3,700
Goodwill 10,610
Current liabilities (101 )
Deferred tax liabilities (1,416 )
Total preliminary estimated purchase price $ 13,164
Our estimates and assumptions related to the purchase price
allocation are preliminary and subject to change during the
measurement period (up to one year from the acquisition date) as we
finalize the amount of intangible assets, goodwill and deferred
taxes recorded in connection with the acquisition.
Acquisition-related costs incurred, which primarily included legal
and accounting fees and other external costs directly related to
the acquisition, were expensed as incurred and were not
material.
The results of operations related to the acquisition of Naked
Apartments have been included in our condensed consolidated
financial statements since the date of acquisition, and are not
significant. Pro forma financial information for the acquisition
accounted for as a business combination has not been presented, as
the effects were not material to our condensed consolidated
financial statements.
Acquisition of Trulia
Effective February 17, 2015, pursuant to the Merger Agreement
dated as of July 28, 2014 by and among Zillow, Zillow Group
and Trulia, following the consummation of the transactions
contemplated by the Merger Agreement, each of Zillow and Trulia
became wholly owned subsidiaries of Zillow Group. With the addition
of Trulia, we expanded our audience and added another consumer
brand that offers buyers, sellers, homeowners and renters access to
information about homes and real estate for free, and provides
advertising and software solutions that help real estate
professionals grow their business.
At the effective time of the merger, each share of Zillow
Class A common stock was converted into the right to receive
one share of fully paid and nonassessable Zillow Group Class A
common stock, and each share of Zillow Class B common stock was
converted into the right to receive one share of fully paid and
nonassessable Zillow Group Class B common stock. Generally, each
Zillow stock option and restricted stock unit outstanding (whether
or not vested or exercisable) as of the effective time of the
merger was assumed by Zillow Group and converted into a
corresponding equity award to purchase or acquire shares of Zillow
Group Class A common stock, subject to the same terms,
conditions and restrictions as the original option or award. Any
unvested shares of Zillow Class A common stock subject to a
repurchase option, risk of forfeiture or other condition as of the
effective time of the merger were exchanged for shares of Zillow
Group Class A common stock that were also unvested and subject
to the same repurchase option, risk of forfeiture or other
condition. Each Zillow restricted unit outstanding as of the
effective time of the merger was assumed by Zillow Group and
converted into the right to receive Zillow Group Class A
common stock, subject to the same terms, conditions and
restrictions as the original restricted unit.
At the effective time of the merger, each share of Trulia common
stock was converted into the right to receive 0.444 of a share of
fully paid and nonassessable Zillow Group Class A common
stock. Generally, each Trulia stock option, restricted stock unit,
and stock appreciation right outstanding (whether or not vested or
exercisable) as of the effective time of the merger was assumed by
Zillow Group and converted into a corresponding equity award to
purchase, acquire shares of, or participate in the appreciation in
the price of Zillow Group Class A common stock, subject to the
same terms, conditions and restrictions as the original option or
award, subject to specified adjustments to reflect the effect of
the Trulia exchange ratio. Each outstanding unvested Trulia stock
option and restricted stock unit held by a member of the Trulia
board of directors immediately prior to the effective time of the
merger who was not an employee of Trulia or any subsidiary of
Trulia became fully vested immediately prior to the effective time
of the merger in accordance with the terms of the applicable award
agreements.
Our acquisition of Trulia has been accounted for as a business
combination, and assets acquired and liabilities assumed were
recorded at their estimated fair values as of February 17,
2015. Goodwill, which represents the expected synergies from
combining the acquired assets and the operations of the acquirer,
as well as intangible assets that do not qualify for separate
recognition, is measured as of the acquisition date as the excess
of consideration transferred, which is also measured at fair value,
and the net of the fair values of the assets acquired and the
liabilities assumed as of the acquisition date.
In all cases in which Zillow Group’s closing stock price is a
determining factor in arriving at the amount of merger
consideration, the stock price assumed is the closing price of
Zillow Class A common stock on NASDAQ on February 17,
2015 ($109.14 per share, unadjusted for the August 2015 stock split
effected in the form of a dividend). The purchase price to effect
the acquisition of Trulia of approximately $2.0 billion is
summarized in the following table (in thousands):
Value of Class A common stock issued $ 1,883,728
Substituted stock options and stock appreciation rights assumed by
Zillow Group attributable to pre-combination service 54,853
Substituted restricted stock units assumed by Zillow Group
attributable to pre-combination service 27,798
Cash paid in lieu of fractional outstanding shares 41
Total purchase price $ 1,966,420
A total of 17,259,704 shares of Zillow Group Class A common
stock were issued in connection with the acquisition of Trulia.
Trulia stockholders did not receive any fractional shares of Zillow
Group Class A common stock in connection with the acquisition.
Instead of receiving any fractional shares, each holder of Trulia
common stock was paid an amount in cash (without interest) equal to
such fractional amount multiplied by the last reported sale price
of Zillow Class A common stock on NASDAQ on the last complete
trading day prior to the date of the effective time of the
merger.
A portion of the purchase price has been attributed to the
substitution of Trulia’s stock options, restricted stock
units and stock appreciation rights outstanding as of
February 17, 2015, for corresponding stock options, restricted
stock units and stock appreciation rights to purchase, vest in or
participate in the appreciation in the price of shares of Zillow
Group Class A common stock, all at an exchange ratio of 0.444.
The fair value of Trulia’s share-based awards assumed in
connection with the acquisition, including stock options,
restricted stock units and stock appreciation rights, which relate
to post-combination service will be recorded by Zillow Group as
share-based compensation expense ratably over the remaining related
vesting period of the respective award. The share-based
compensation expense related to stock options and stock
appreciation rights assumed is estimated at the acquisition date
using the Black-Scholes-Merton option-pricing model, assuming no
dividends, expected volatility of 53%, a risk-free interest rate of
1.10%, and an expected life of three years. For restricted stock
units assumed, Zillow Group used the market value of Zillow’s
Class A common stock on the date of acquisition to determine
the fair value of the award.
The total purchase price has been allocated to the assets acquired
and liabilities assumed, including identifiable intangible assets,
based on their respective fair values at the acquisition date.
Based upon the fair values determined by us, in which we considered
or relied in part upon a valuation report of a third-party expert,
the total purchase price was allocated as follows (in
thousands):
Cash and cash equivalents $ 173,447
Accounts receivable 13,093
Prepaid expenses and other current assets 20,833
Restricted cash 6,946
Property and equipment 30,189
Other assets 434
Identifiable intangible assets 549,000
Goodwill 1,736,362
Accounts payable, accrued expenses and other current
liabilities (51,258 )
Accrued compensation and benefits (8,324 )
Deferred revenue (8,300 )
Long-term debt (230,000 )
Debt premium recorded in additional paid-in capital (126,386 )
Deferred tax liabilities and other long-term liabilities (139,616 )
Total purchase price $ 1,966,420
The fair value of identifiable intangible assets acquired consisted
of the following (in thousands):
Estimated Estimated Useful Life
Trulia trade names and trademarks $ 351,000 Indefinite
Market Leader trade names and trademarks 2,000 2
Customer relationships 92,000 3-7
Developed technology 91,000 3-7
Advertising relationships 9,000 3
MLS home data feeds 4,000 3
Total $ 549,000
The fair value of the intangible assets acquired was determined by
Zillow Group, and Zillow Group considered or relied in part upon a
valuation report of a third-party expert. Zillow Group used an
income approach to measure the fair value of the trade names and
trademarks and the developed technology based on the
relief-from-royalty method. Zillow Group used an income approach to
measure the fair value of the customer relationships based on the
excess earnings method, whereby the fair value is estimated based
upon the present value of cash flows that the applicable asset is
expected to generate. Zillow Group used an income approach to
measure the fair value of the advertising relationships based on a
with and without analysis, whereby the fair value is estimated
based on the present value of cash flows the combined business is
expected to generate with and without the advertising
relationships. Zillow Group used a cost approach to measure the
fair value of the MLS home data feeds based on the estimated cost
to replace the data feed library. These fair value measurements
were based on Level 3 measurements under the fair value
hierarchy.
A portion of the total purchase price was allocated to
Trulia’s 2020 Notes (see Note 9). In accordance with the
accounting guidance related to business combinations, the 2020
Notes are recognized at fair value as of the effective date of the
acquisition. The fair value of the 2020 Notes as of the date of
acquisition was approximately $356.4 million. The fair value of the
2020 Notes as of the date of acquisition was determined by Zillow
Group, and Zillow Group considered or relied in part upon a
valuation report of a third-party expert. The fair value of the
2020 Notes was determined through combination of the use of a
binomial lattice valuation model and consideration of quoted market
prices. The fair value is classified as Level 3 due to the use of
significant unobservable inputs such as implied volatility of
Zillow Group’s Class A common stock, discount spread and
the limited trading activity for the 2020 Notes. Given the fair
value of the 2020 Notes as of the date of acquisition of $356.4
million was at a substantial premium to the principal amount of
$230.0 million, the premium amount of $126.4 million has been
recorded as additional paid-in capital in the consolidated balance
sheet as of the effective date of the acquisition. Accordingly,
Zillow Group has recognized the liability component of the 2020
Notes at the stated par amount in the consolidated balance sheet as
of the effective date of the acquisition. The conversion feature
included in the 2020 Notes is not required to be bifurcated and
separately accounted for as it meets the equity scope exception
given the conversion feature (i) is indexed to Zillow
Group’s Class A common stock and (ii) would be
classified in shareholder’s equity. Further, the 2020 Notes
do not permit or require Zillow Group to settle the debt in cash
(in whole or in part) upon conversion.
A portion of the total purchase price was allocated to deferred tax
liabilities primarily related to an indefinite-lived intangible
asset generated in connection with the acquisition. Due to the
recognition of a $351.0 million indefinite-lived Trulia trade name
and trademark intangible asset as of the effective date of the
acquisition, a deferred tax liability of $139.5 million was
recognized which cannot be offset by the recognized deferred tax
assets.
The results of operations related to the acquisition of Trulia have
been included in our consolidated financial statements since the
date of acquisition of February 17, 2015. However,
disclosure of the amounts of revenue and earnings of the acquiree
since the acquisition date is impracticable because discrete
financial information is not available due to the rapid integration
of Zillow’s and Trulia’s operations.
Unaudited Pro Forma Financial Information
The following unaudited pro forma condensed combined financial
information gives effect to the acquisition of Trulia as if it were
consummated on January 1, 2014 (the beginning of the
comparable prior reporting period in the year of acquisition). The
unaudited pro forma condensed combined financial information is
presented for informational purposes only. The unaudited pro forma
condensed combined financial information does not represent true
historical financial information. Further, the unaudited pro forma
condensed combined financial information is not intended to
represent or be indicative of the results of operations that would
have been reported had the acquisition occurred on January 1,
2014 and should not be taken as representative of future results of
operations of the combined company.
The following table presents the unaudited pro forma condensed
combined financial information for the periods presented, except
for the financial information presented for the three and nine
month periods ended September 30, 2016 and revenue for the
three months ended September 30, 2015, which are presented on
an as-reported basis (in thousands):
Three Months Ended Nine Months Ended
2016 2015 (1) 2016 2015 (2)
Revenue $ 224,592 $ 176,765 $ 618,977 $ 510,565
Net income (loss) $ 6,807 $ (21,393 ) (196,947 ) $ (65,978 )
(1) The pro forma net loss for the three
months ended September 30, 2015 includes pro forma adjustments
for $3.4 million to eliminate restructuring costs associated
with the acquisition of Trulia reflected in the historical
financial statements and $1.2 million to eliminate direct and
incremental acquisition-related costs reflected in the historical
financial statements.
(2) The pro forma net loss for the nine
months ended September 30, 2015 includes pro forma adjustments
for $49.1 million to eliminate direct and incremental
acquisition-related costs reflected in the historical financial
statements, $37.3 million to eliminate share-based compensation
expense attributable to substituted equity awards and to record
additional share-based compensation expense attributable to
substituted equity awards, $35.3 million to eliminate restructuring
costs associated with the acquisition of Trulia reflected in the
historical financial statements, $2.4 million to record additional
amortization expense for acquired intangible assets and $1.1
million to eliminate Trulia’s historical amortization of
capitalized website development costs. |
