Quarterly report pursuant to Section 13 or 15(d)

Business Combinations

v3.5.0.2
Business Combinations
 9 Months Ended
Sep. 30, 2016
Business Combinations [Abstract]  
Business Combinations
Business Combinations

Emerging Markets Communications

On July 27, 2016,the Company completed the EMC Acquisition. The total consideration paid to the member unit holders of EMC on the EMC Acquisition Date for 100% of their membership interests, which is subject to customary post-closing working capital and other adjustments, had a value of approximately $166.5 million and consisted of (i) $45.5 million in cash paid at closing, (ii) the issuance of approximately 5.5 million newly issued shares of Company common stock at closing, (iii) the redemption for cash of approximately $55.1 million of existing seller preferred stock, and (iv) deferred consideration of $25 million to be paid in cash or newly issued shares of the Company's common stock (at the Company’s option) one year after the Acquisition Date. The Company also effectively settled a pre-existing relationship with a subsidiary of EMC resulting in additional consideration of $0.2 million. Further, in connection with the acquisition, the Company assumed approximately $370.8 million of EMC indebtedness, which represents the fair value of the debt on the EMC Acquisition Date.

The EMC Acquisition is intended to provide growth opportunities by expanding into a complementary maritime market which will provide synergies by leveraging existing infrastructure and suppliers to achieve improved efficiencies and cost savings resulting from removing overlap in existing network infrastructure, reduced bandwidth costs, lower development expenses and integrating internal operations. The acquisition will also allow for cross-selling opportunities for the Company's content, digital media and operations solutions products into the maritime market.
The consideration for EMC Acquisition consisted of the following (in thousands, except share and per share and amounts as stated in footnotes to the table):

Cash consideration paid to seller (a)
$
100,658

5,466,886 Company common shares multiplied by the $8.03 closing share price per share of on July 27, 2016, less a 7.5% discount for restrictions on transferability (b)
40,607

Deferred consideration
25,000

Settlement of pre-existing relationship
228

Estimated consideration
$
166,493


(a)
The cash consideration includes: (i) the minimum cash payment of $30.0 million; (ii) the change of control restructuring bonus plan payout of $4.5 million; (iii) a payment of $1.0 million that was due in 2016 for deferred purchase price for a prior EMC acquisition; (iv) seller’s transaction expenses of $5.8 million; (v) the indemnity escrow amount of approximately $2.7 million; (vi) the adjustment escrow amount of $1.5 million and (vii) $55.1 million to redeem shares held by the preferred stock shareholders.

The change of control restructuring bonus plan allowed a group of employees to be eligible for bonuses if they achieved certain metrics under certain EMC bonus plans and if there was a change in control. As a result of the EMC Acquisition, this amount was paid by GEE to EMC, which was then paid to the employees. As the payment was made concurrently with the EMC Acquisition, the cash paid for these bonuses was included in the consideration and was not assumed as a liability.
(b)
A discount was applied to the GEE shares issued in connection with the EMC Acquisition as the shares issued were not registered with the U.S. Securities and Exchange Commission. Although a registration statement for these shares is now effective, the shares are subject to sale restrictions under the registration statement during blackout periods until such time the restriction is lifted or lapses.
The following is a summary of the preliminary purchase price to the estimated fair values of the identifiable assets acquired and the liabilities at the EMC Acquisition date (dollars in thousands):

 
Amounts Recognized and Reported as of EMC Acquisition Date
Cash and cash equivalents
$
9,032

Restricted cash
17,802

Other current assets
58,220

Property, plant and equipment
94,321

Equity method investments (a)
102,719

Intangible assets (b)
134,900

Other non-current assets
1,074

Accounts payable and accrued liabilities
(47,067
)
Deferred revenue
(6,652
)
Debt, including current
(370,845
)
Deferred tax liabilities, net
(74,082
)
Deferred revenue, non-current
(2,278
)
Other non-current liabilities
(22,170
)
Estimated fair value of net assets acquired
$
(105,026
)
Consideration transferred
166,493

Estimated goodwill
$
271,519


(a)
Represents 49% joint ventures in Wireless Maritime Services, LLC (“WMS Joint Venture”) and Santander Teleport (“Santander Joint Venture”).

(b)
The intangible assets are comprised of the following (dollars in thousands):

 
Weighted Average Useful Life (Years)
 
Fair Value
Completed technology
6.0
 
$
21,800

Customer relationships
19.0
 
19,100

Favorable vendor agreements
9.0
 
91,800

Trademarks
5.0
 
2,200

Total value of intangible assets
 
 
$
134,900



The final determination of the purchase price allocation will be based on EMC’s net assets acquired as of the EMC Acquisition Date and will depend on a number of factors, which cannot be predicted with certainty at this time. The purchase price allocation may change materially based on the receipt of more detailed information, including information pertaining to equity method investments, vendor agreements and income taxes. Under the acquisition method of accounting for business combinations, if the Company identifies changes to acquired deferred tax assets or liabilities during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment, and the Company will record the offset to goodwill. All other changes to deferred tax assets and liabilities will be recorded in current period income tax expense. This accounting applies to all of the Company’s acquisitions regardless of acquisition date.
All of the estimated goodwill arising from the EMC Acquisition is attributable to the Company's Connectivity segment.

The Company reported transaction and integration expenses related to the EMC Acquisition of $18.5 million for the nine months ended September 30, 2016 and $1.8 million for the year ended December 31, 2015, as follows (amounts in thousands):

 
Nine Months Ended 
 September 30, 2016
 
Year Ended 
 December 31, 2015
Professional and consulting expenses
$
7,975

 
$
1,785

Banking fees
10,564

 
—

 
$
18,539

 
$
1,785


Those expenses are included in the Consolidated Statements of Operations as General & Administrative expenses.

The acquired business contributed revenues of $31.9 million and net loss of $9.3 million to the Company for the period beginning July 27, 2016 and ended September 30, 2016.

The following unaudited pro forma summary presents consolidated information of EMC as if the business combination had occurred on January 1, 2015 (in thousands):

 
Nine Months Ended 
 September 30, 2016
 
Nine Months Ended 
 September 30, 2015
Total revenue
$
478,496

 
$
583,603

Net loss
(89,034
)
 
21,818


The most significant pro forma adjustments were to reflect the (net of tax) impact of: (i) the amortization expenses related to intangibles; and (ii) the interest expense on the existing debt taking into account the fair value adjustment to the debt as of the EMC Acquisition Date.

The above unaudited pro forma financial information is for informational purposes only and may not necessarily reflect the actual results of operations had the EMC Acquisition been consummated on January 1, 2015. These pro forma amounts are not designed to represent the future expected financial results of the Company.

Application of the Acquisition Method of Accounting: The Company applied the acquisition method of accounting and measured the identifiable assets acquired and the liabilities assumed on the EMC Acquisition Date. These fair values were determined using the market and income approaches. The fair value measurement of each major asset acquired and liability assumed is discussed separately below:

Equity method investments: The estimated value of the investment in WMS was performed using the income approach to arrive at the present value of debt free cash flows from which a discount for lack of control was applied. A market valuation approach was also performed by comparison relative to guideline public companies. The values obtained under the income approach and market approach were then averaged to arrive at an estimated fair value of the equity of WMS to which the Company's 49% interest was then applied.

Intangible assets: Primarily includes vendor relationships, completed technology and customer relationships. The fair value of the vendor relationships was determined by using a discounted cash flow model under the income valuation approach. The fair value of completed technology was determined by the relief from royalty income valuation approach which estimates the cost savings over what would otherwise be incurred to pay royalties or license fees on revenues attributed to the use of the asset. The fair value of customer relationships was determined using the excess earnings income valuation methodology. This method measures the value of an intangible asset by calculating the residual profit after subtracting the appropriate returns for all other complementary assets that benefit the business.

 Debt: The fair value of debt was estimated using quoted market prices where available, which represented 93% of the outstanding balance of the debt on the EMC Acquisition Date. The fair value of the remaining debt without quoted market prices was estimated based on implied values using current market prices for similar debt.

Income taxes: The acquisition of EMC’s membership interests is treated as an acquisition of assets for US income tax purposes. This results in step-up of tax basis of the acquired assets to equal the fair value assigned. Goodwill created from the allocation of fair value to EMC’s resulted in tax deductible goodwill of $92.1 million. The acquired assets include stock of EMC’s US and non-US subsidiaries. For these entities, the step-up to fair value resulted in an increase to the value of the shares acquired but such subsidiaries retain all tax attributes and inside tax basis of assets at the carrying value as of the transaction date.
2015 Acquisitions

During the quarter ended September 30, 2015, the Company completed four acquisitions. The following table summarizes the fair value of the assets and liabilities assumed in the acquisitions (dollars in thousands):

 
Weighted Average Useful Life (Years)
 
Amounts at December 31, 2015 (Preliminary)
 
Adjustments
 
Purchase Price Allocation, as Adjusted
Goodwill
 
 
$
41,093

 
$
(812
)
 
$
40,281

Customer relationships
7.6
 
14,000

 
—

 
14,000

Developed technology
5.7
 
21,900

 
—

 
21,900

Trade name
5.0
 
200

 
—

 
200

Accounts receivable
 
 
6,450

 
—

 
6,450

Property and equipment
 
 
1,783

 
—

 
1,783

Deferred tax liability
 
 
(11,047
)
 
—

 
(11,047
)
Accrued expenses
 
 
(4,379
)
 
—

 
(4,379
)
Other liabilities assumed, net of assets acquired
 
 
(1,669
)
 
812

 
(857
)
Total consideration transferred
 
 
$
68,331

 
$
—

 
$
68,331



During the three months ended March 31, 2016, the Company revised its analysis of the fair value of one of these acquisitions. The revised analysis related to a pre-acquisition contingency that was subsequently identified relating to a change in the Company's ability to recover amounts held in escrow by the seller of the RMG Assets. Due to the preliminary nature of the financial results prior to each of the acquisitions in 2015, the Company was unable to provide an accurate assessment of certain deferred tax assets, deferred tax liabilities and estimated income taxes payable for the period(s) prior to each acquisition date. These balances were finalized during the six months ended June 30, 2016.