Acquisitions | Acquisitions The Company accounts for business acquisitions in accordance with the acquisition method of accounting as prescribed by FASB ASC Topic 805, Business Combinations. The acquisition method of accounting requires the Company to record the net assets and liabilities acquired based on their estimated fair values as of the acquisition date, with any excess of the consideration transferred over the estimated fair value of the net assets acquired, including identifiable intangible assets, to be recorded to goodwill. Under the acquisition method, the operating results of acquired companies are included in the Company's consolidated financial statements beginning on the date of acquisition. The Company completed the following business acquisitions during 2017: CEB On April 5, 2017, the Company acquired 100% of the outstanding capital stock of CEB for an aggregate purchase price of $3.5 billion . The consideration transferred by Gartner included approximately $2.7 billion in cash and $818.7 million in fair value of Gartner common shares. CEB was a publicly-held company headquartered in Arlington, Virginia with approximately 4,900 employees. CEB's primary business is to serve as a leading provider of subscription-based, best practice research and analysis focusing on human resources, sales, finance, IT, and legal. CEB serves executives and professionals at corporate and middle market institutions in over 70 countries. L2 On March 9, 2017 , the Company acquired 100% of the outstanding capital stock of L2, a privately-held firm based in New York City with 150 employees, for an aggregate purchase price of $134.2 million . L2 is a subscription-based research business that benchmarks the digital performance of brands. Total Consideration Transferred The following table summarizes the aggregate consideration paid or payable for these acquisitions (in thousands): Aggregate consideration (1): CEB L2 Total Cash paid at close (2), (3) $ 2,687,704 $ 134,199 $ 2,821,903 Additional cash paid (2) 12,465 — 12,465 Fair value of Gartner equity awards (4) 818,660 — 818,660 Total (5) $ 3,518,829 $ 134,199 $ 3,653,028 (1) Includes the total consideration transferred for 100% of the outstanding capital stock of the acquired businesses. (2) The cash paid at close represents the gross contractual amount paid. The Company paid the additional $12.5 million in cash in third quarter 2017. Net of cash acquired from these businesses and for cash flow reporting purposes, the Company paid $2.63 billion in cash. (3) The Company borrowed a total of approximately $2.78 billion in conjunction with the CEB acquisition (see Note 7 — Debt for additional information). (4) Consists of the fair value of (i) Gartner common stock issued (see Note 8 — Equity for additional information) and (ii) stock-based compensation replacement awards. (5) The Company may also be required to pay up to an additional $20.8 million in cash for L2 which is contingent on the achievement of certain employment conditions by several key employees. This amount is being recognized as compensation expense over approximately three years. The allocation of the purchase price for the L2 and CEB acquisitions are preliminary with respect to various matters, to include leases and leasehold improvements; tax contingencies; and other items. The Company expects to complete the allocation of the purchase price by the end of the accounting measurement period for the respective acquisition. Preliminary Allocation of Purchase Price The following table summarizes the preliminary allocation of the purchase price to the fair value of the assets acquired and liabilities assumed for the acquisitions of L2 and CEB (in thousands): CEB (3) L2 (4) Total Assets: Cash $ 194,706 $ 4,852 $ 199,558 Fees receivable 175,440 8,277 183,717 Prepaid expenses and other current assets 52,032 1,167 53,199 Property, equipment and leasehold improvements 51,751 663 52,414 Goodwill (1) 2,267,087 109,779 2,376,866 Finite-lived intangible assets (2) 1,574,100 15,890 1,589,990 Other assets 182,720 12,321 195,041 Total assets $ 4,497,836 $ 152,949 $ 4,650,785 Liabilities: Accounts payable and accrued liabilities $ 130,544 $ 3,050 $ 133,594 Deferred revenues (current) 246,472 13,200 259,672 Other liabilities 601,991 2,500 604,491 Total liabilities $ 979,007 $ 18,750 $ 997,757 Net assets acquired $ 3,518,829 $ 134,199 $ 3,653,028 (1) The Company believes the goodwill resulting from the acquisitions is supportable based on anticipated synergies. For CEB, among the factors contributing to the anticipated synergies are a broader market presence, expanded product offerings and market opportunities, and an acceleration of CEB's growth by leveraging Gartner's global infrastructure and best practices in sales productivity and other areas. None of the recorded goodwill is expected to be deductible for tax purposes. See Note 6 — Goodwill and Intangible Assets for additional information. (2) All of the acquired intangible assets are finite-lived. The determination of the fair value of the finite-lived intangible assets required management judgment and the consideration of a number of factors. In determining the fair values, management primarily relied on income valuation methodologies, in particular discounted cash flow models. The use of discounted cash flow models required the use of estimates, significant among them projected cash flows related to the particular asset; the useful lives of the particular assets; the selection of royalty and discount rates used in the models; and certain published industry benchmark data. In establishing the estimated useful lives of the finite-lived intangible assets, the Company relied on both internally-generated data for similar assets as well as certain published industry benchmark data. We believe the values we have assigned to the finite-lived intangible assets are both reasonable and supportable. See Note 6 — Goodwill and Intangible Assets for additional information regarding the finite-lived intangible assets. (3) The Company's financial statements include the operating results of CEB beginning on April 5, 2017, the date of acquisition. CEB's operating results and the related goodwill are being reported as part of the Company's Research, Events, and Talent Assessment & Other segments. The Company recorded certain measurement period adjustments for the CEB preliminary purchase price allocation during the third quarter of 2017, primarily related to certain tenant improvement incentives, which increased Prepaid expenses and Other assets, with a reduction to goodwill. Had the Company acquired CEB in prior periods, the impact to the Company's operating results would have been material, and as a result the following pro forma consolidated financial information (unaudited) is presented as if CEB had been acquired by the Company on January 1, 2016 (in thousands, except per share amounts): Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 Pro forma total revenue $ 891,003 $ 756,083 $ 2,664,450 $ 2,233,942 Pro forma net (loss) (7,283 ) (40,825 ) (71,122 ) (133,379 ) Pro forma basic and diluted (loss) per share (0.08 ) (0.45 ) (0.79 ) (1.48 ) The pro forma results have been prepared in accordance with U.S. GAAP and include the following pro forma adjustments: (a) An increase in interest expense and amortization of debt issuance costs related to the financing of the CEB acquisition. Note 7 — Debt provides further information regarding the Company's borrowings related to the CEB acquisition; (b) A decrease in revenue as a result of the required fair value adjustment to deferred revenue; and (c) An adjustment for additional depreciation and amortization expense as a result of the preliminary purchase price allocation for finite-lived intangible assets and property, equipment, and leasehold improvements. (4) The Company's financial statements include the operating results of L2 beginning on March 9, 2017, the acquisition date. L2's operating results were not material to the Company's consolidated operating results and segment results for either the three or nine months ended September 30, 2017. Had the Company acquired L2 in prior periods, the impact to the Company's operating results would not have been material, and as a result pro forma financial information for L2 for prior periods has not been presented. L2's operating results and the related goodwill are being reported as part of the Company's Research segment. The Company recognized $30.5 million and $142.1 million of acquisition and integration charges in the three and nine months ended September 30, 2017, respectively, compared to $16.6 million and $33.0 million in the three and nine months ended September 30, 2016. The additional charges during 2017 primarily consisted of higher professional fees, severance, stock-based compensation charges, and accruals for exit costs for certain office space that the Company does not intend to occupy at a new building in Arlington, Virginia that was related to the CEB acquisition. The following table presents a summary of the amounts related to this space for the period ended September 30, 2017 (in thousands): For the period ended September 30, 2017 Liability balance at December 31, 2016 $ — Charges during the six months ended June 30, 2017 20,149 Liability balance at June 30, 2017 20,149 Charges and adjustments during the three months ended September 30, 2017 974 Liability balance at September 30, 2017 $ 21,123 |