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Business Combinations, Goodwill and Intangible Assets | 12 Months Ended
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Dec. 31, 2014
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Business Combinations, Goodwill and Intangible Assets |
6. | Business combinations, goodwill and intangible assets
Business combinations Acquisition of AutoPlaza.com in Mexico On September 14, 2011, the Company completed, through one of its subsidiaries, Meli Participaciones, S.L. (“ETVE” or “the Buyer”), the acquisition of the 60 % of outstanding membership interest of Autopark LLC, a limited liability company organized under the laws of Delaware, from Hasteny Trading S.A. (“Hasteny” or “the Seller”), a parent company organized under the laws of Uruguay, who owned all the shares of the capital stock of Autopark LLC. Autopark LLC owns directly and indirectly the 100% of the membership interest of AP Clasificados S.R.L. de C.V. (“AP Clasificados”), a company organized under the laws of Mexico. AP Clasificados operates an online classified advertisements platform in Mexico primarily dedicated to the sale of vehicles and real estate (“the Acquired Business”). On September 12, 2014, ETVE acquired the remaining 40% of the membership interest of Autopark LLC for a total amount of $4,000,000 in order to own the 100% of the membership interest of the Acquired Business. On December 10, 2014, ETVE paid with its own funds the total price. Acquisition of online classifieds advertisement companies in Chile and Mexico On April 8, 2014, through its subsidiaries Meli Inversiones SpA and Meli Participaciones, S.L., the Company acquired 100% of the issued and outstanding shares of capital stock of the companies VMK S.A., Inmobiliaria Web Chile S. de R.L. de C.V. and Inmuebles Online S.A., companies that operate online classified advertisements platforms dedicated to the sale of real estate in Chile through Portal Inmobiliario brand and in Mexico through Guia de Inmuebles brand, in order to increase its participation on e-commerce business in those countries. The aggregate purchase price for the acquisition of the 100% of the acquired business was $37,989,865, measured at its fair value, amount that included: (i) the total cash payment of $32,147,755 at closing day; (ii) an escrow of $1,000,000 held in an escrow agent, according to the stock purchase agreement; (iii) the contingent additional cash considerations and escrows up to $4,621,085 in case the companies achieve certain revenue performance targets during 2014 and 2015, measured at fair value; and, (iv) an additional price adjustment escrow of $221,025, which was paid in January 2015. In addition, the Company incurred in certain direct costs of the business combination which were expensed as incurred. As of December 31, 2014, the fair value of the contingent consideration recorded is $4,833,061. Contingent additional cash considerations are to be paid after the achievement of the performance targets. The Company’s consolidated statement of income includes the results of operations of the acquired business as from April 8, 2014. The net revenues and net income of the acquiree included in the Company’s consolidated statement of income since the acquisition amounted to $10,631,998 and $2,207,709, respectively. The following table summarizes the purchase price allocation for the acquisition:
|  | Chile |  |  | Mexico |  |  | Total |
Cash and cash equivalents |  | $ | 546,736 |  |  | $ | 474,214 |  |  | $ | 1,020,950 |
Other net tangible assets / (liabilities) |  |  | 2,306,226 |  |  |  | (2,727,285 | ) |  |  | (421,059 | )
Trademarks |  |  | 5,422,000 |  |  |  | 2,155,000 |  |  |  | 7,577,000 |
Customer Lists |  |  | 10,104,059 |  |  |  | 321,809 |  |  |  | 10,425,868 |
Software |  |  | 446,625 |  |  |  | — |  |  |  | 446,625 |
Non solicitation agreement |  |  | 587,000 |  |  |  | — |  |  |  | 587,000 |
Deferred tax assets and liabilities |  |  | (2,643,784 | ) |  |  | 213,973 |  |  |  | (2,429,811 | )
Goodwill |  |  | 14,709,583 |  |  |  | 6,073,709 |  |  |  | 20,783,292 |
Purchase Price |  | $ | 31,478,445 |  |  | $ | 6,511,420 |  |  | $ | 37,989,865 |
The purchase price was allocated based on the measurement of the fair value of assets acquired and liabilities assumed considering the information available as of the date of these consolidated financial statements. The valuation of identifiable intangible assets acquired reflects management’s estimates based on the use of established valuation methods. Such assets consist of trademarks, customer lists, software and non-solicitation agreements for a total amount of $19,036,493. Management of the Company estimates that trademarks have an indefinite lifetime and the intangible assets associated with customer list will be amortized over a ten year period. The non-solicitation agreement intangible asset will be amortized over a four year period and the software in three years. Acquisitions of Software Development Companies in Argentina On March 22, 2013, the Company completed, through its subsidiaries Meli Participaciones S.L. (ETVE) and MercadoLibre S.R.L. (MercadoLibre Argentina) (together referred to as the “Buyer”), the acquisition of the 100% of equity interest in a software development company located and organized under the laws of the Province of Cordoba, Argentina. The objective of the acquisition was to enhance the capabilities of the Company in terms of software development. The aggregate purchase price for the acquisition of the 100% of the acquired business was $3,454,497 (settled in Argentine pesos 17,652,480). On such same date, the Buyer paid and agreed to pay the purchase price as follows: i) $2,191,781 in cash; ii) set an escrow amounting to $489,237 for a 24-months period, aiming to cover unexpected liabilities and negative working capital; iii) set an escrow amounting to $547,945 for a 36-months period, aiming to continue the employment relationship of certain key employees; and iv) on June 24, 2013 the Company paid the remaining $225,534 net of certain negative working capital adjustments. In addition, the Company incurred in certain direct costs of the business combination which were expensed as incurred. The above mentioned escrow for the continuing employment relationship of $547,945 is expensed over the 36-months period or a lesser period of time if certain other conditions determined in the Selling and Purchase Agreement (SPA) occur. The escrow will be released at the end of such period, together with the accrued interest. The Company’s consolidated statement of income includes the results of operations of the acquired business as from March 22, 2013. The net revenues and net loss of the acquiree included in the Company’s consolidated statement of income as of December 31, 2013 since the acquisition amounted to $524,965 and $7,562, respectively. The following table summarizes the definitive purchase price allocation for the acquisition:
Net assets acquired |  | $ | 237,891 |
Goodwill |  |  | 2,668,661 |
Purchase price |  |  | 2,906,552 |
Escrow for employment relationship |  |  | 547,945 |
Aggregate price paid |  | $ | 3,454,497 |
Additionally, on December 15, 2014, the Company completed, through its subsidiaries Meli Participaciones S.L. and Marketplace Investment LLC, a limited liability company organized under the laws of Delaware, USA (together referred to as the “Buyers”), the acquisition of the 100% of equity interest of Business Vision S.A., a software development company located and organized under the laws of the Buenos Aires City, Argentina. The objective of the acquisition was to enhance the capabilities of the Company in terms of software development. The aggregate purchase price for the acquisition of the 100% of the acquired business was $4,768,549. On such same date, the Buyer paid and agreed to pay the purchase price as follows: i) $3,803,955 in cash, net of $111,045 of negative working capital adjustments; ii) set an escrow amounting to $250,000 for a 24-months period, aiming to cover unexpected adjustments to the initial aggregate purchase price; and iii) set an escrow amounting to $735,000, 50% for a 12-months period and 50% for a 24-months period since the closing date. The Company’s consolidated statement of income includes the results of operations of the acquired business as from December 15, 2014. The net revenues and net loss of the acquiree included in the Company’s consolidated statement of income as of December 31, 2014, are immaterial to the consolidated financial statements. The following table summarizes the definitive purchase price allocation for the acquisition:
Cash and cash equivalents |  | $ | 81,219 |
Other net tangible assets |  |  | 856,781 |
Total net tangible assets acquired |  | $ | 938,000 |
Customer Lists |  |  | 563,000 |
Non solicitation agreement |  |  | 427,976 |
Deferred tax assets and liabilities |  |  | (299,770 | )
Goodwill |  |  | 3,139,343 |
Purchase Price |  | $ | 4,768,549 |
Supplemental pro-forma information required by U.S. GAAP, is impracticable after making every reasonable effort to do so, however, amounts involved are deemed to be immaterial. In both acquisitions described above, arising goodwill has been allocated proportionally to each of the segments identified by the Company’s management, considering the synergies expected from this acquisition and it is expected that the acquiree will contribute to the earnings generation process of such segments. The Company recognized goodwill for those acquisitions based on management expectation that the acquired businesses will increase the software capabilities of the Company and will improve the Company’s business in Latin America. Goodwills are not deductible for tax purposes, except for the proportion acquired by Meli Inversiones SpA (Chile) of the Portal Inmobiliario brand in Chile. The results of operations for periods prior to the acquisitions, individually and in the aggregate, were not material to the consolidated statements of operations of the Company and, accordingly, pro forma information has not been presented. Goodwill and intangible assets The composition of goodwill and intangible assets is as follows:
|  | December 31, 2014 |  |  | December 31, 2013 |
Goodwill |  | $ | 68,828,504 |  |  | $ | 55,101,218 |
Intangible assets with indefinite lives |  |  |  |  |  |  |  |
– Trademarks |  |  | 10,276,386 |  |  |  | 5,238,090 |
Amortizable intangible assets |  |  |  |  |  |  |  |
– Licenses and others |  |  | 5,110,836 |  |  |  | 3,430,003 |
– Non-compete / solicitation agreement |  |  | 1,829,208 |  |  |  | 1,025,605 |
– Customer list |  |  | 11,293,828 |  |  |  | 1,568,190 |
Total intangible assets |  | $ | 28,510,258 |  |  | $ | 11,261,888 |
Accumulated amortization |  |  | (5,338,909 | ) |  |  | (4,670,303 | )
Total intangible assets, net |  | $ | 23,171,349 |  |  | $ | 6,591,585 |
Goodwill The changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2013 are as follows:
|  | Year ended December 31, 2014 |
|  | Brazil |  |  | Argentina |  |  | Chile |  |  | Mexico |  |  | Venezuela |  |  | Colombia |  |  | Other Countries |  |  | Total |
Balance, beginning of the year |  | $ | 10,366,018 |  |  | $ | 14,676,145 |  |  | $ | 6,520,194 |  |  | $ | 11,376,140 |  |  | $ | 5,251,667 |  |  | $ | 5,506,062 |  |  | $ | 1,404,992 |  |  | $ | 55,101,218 |
– Business acquisition |  |  | 1,538,278 |  |  |  | 775,418 |  |  |  | 14,709,583 |  |  |  | 6,293,463 |  |  |  | 477,180 |  |  |  | 81,623 |  |  |  | 47,090 |  |  |  | 23,922,635 |
– Effect of exchange rates change |  |  | (1,347,193 | ) |  |  | (3,592,495 | ) |  |  | (2,128,326 | ) |  |  | (1,950,906 | ) |  |  | — |  |  |  | (1,066,229 | ) |  |  | (110,200 | ) |  |  | (10,195,349 | )
Balance, end of the year |  | $ | 10,557,103 |  |  | $ | 11,859,068 |  |  | $ | 19,101,451 |  |  | $ | 15,718,697 |  |  | $ | 5,728,847 |  |  | $ | 4,521,456 |  |  | $ | 1,341,882 |  |  | $ | 68,828,504 |
|  | Year ended December 31, 2013 |
|  | Brazil |  |  | Argentina |  |  | Chile |  |  | Mexico |  |  | Venezuela |  |  | Colombia |  |  | Other Countries |  |  | Total |
Balance, beginning of year |  | $ | 10,706,281 |  |  | $ | 18,889,094 |  |  | $ | 7,115,211 |  |  | $ | 11,404,780 |  |  | $ | 4,846,030 |  |  | $ | 5,897,136 |  |  | $ | 1,507,531 |  |  | $ | 60,366,063 |
– Business Acquisition |  |  | 1,307,644 |  |  |  | 659,159 |  |  |  | — |  |  |  | 186,806 |  |  |  | 405,637 |  |  |  | 69,385 |  |  |  | 40,030 |  |  |  | 2,668,661 |
– Effect of exchange rates changes |  |  | (1,647,907 | ) |  |  | (4,872,108 | ) |  |  | (595,017 | ) |  |  | (215,446 | ) |  |  | — |  |  |  | (460,459 | ) |  |  | (142,569 | ) |  |  | (7,933,506 | )
Balance, end of the year |  | $ | 10,366,018 |  |  | $ | 14,676,145 |  |  | $ | 6,520,194 |  |  | $ | 11,376,140 |  |  | $ | 5,251,667 |  |  | $ | 5,506,062 |  |  | $ | 1,404,992 |  |  | $ | 55,101,218 |
Intangible assets with definite useful life Intangible assets with definite useful life are comprised of customer lists and user base, non-compete and non-solicitation agreements, acquired software licenses and other acquired intangible assets including developed technologies. Aggregate amortization expense for intangible assets totaled $1,691,771, $781,074 and $891,661 for the years ended December 31, 2014, 2013 and 2012, respectively. The following table summarizes the remaining amortization of intangible assets with definite useful life as of December 31, 2014.
For year ended 12/31/2015 |  | $ | 2,301,349 |
For year ended 12/31/2016 |  |  | 2,144,583 |
For year ended 12/31/2017 |  |  | 1,852,736 |
For year ended 12/31/2018 |  |  | 1,291,703 |
Thereafter |  |  | 5,304,592 |
|  | $ | 12,894,963 |

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