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Merger with Capella Education Company | 9 Months Ended
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Sep. 30, 2019
Business Combinations [Abstract] |
Merger with Capella Education Company | Merger with Capella Education Company On August 1, 2018, the Company completed its merger with CEC and its wholly-owned subsidiaries, pursuant to a merger agreement dated October 29, 2017. The merger enabled the Company to become a national leader in education innovation that improves affordability and enhances career outcomes by offering complementary programs and sharing academic and technological best practices, through a best-in-class corporate platform supporting two independent universities. Pursuant to the merger agreement, the Company issued 0.875 shares of the Company’s common stock for each issued and outstanding share of CEC common stock. Outstanding equity awards held by existing CEC employees and certain non-employee directors of CEC were assumed by the Company and converted into comparable Company awards at the exchange ratio. Outstanding equity awards held by CEC non-employee directors who did not serve as directors of the Company after completion of the merger were converted to Company awards and settled. Outstanding equity awards held by former CEC employees were settled upon completion of the merger in exchange for cash payments as specified in the merger agreement. The following table summarizes the components of the aggregate consideration transferred for the acquisition of CEC (in thousands):
Fair value of Company common stock issued in exchange for CEC outstanding shares(1) | $ | 1,209,483 |
Fair value of Company equity-based awards issued in exchange for CEC equity-based awards | 27,478 |
Total fair value of consideration transferred | $ | 1,236,961 |
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(1) | The Company issued 10,263,775 common shares at a market price of $117.84 in exchange for each issued and outstanding share of CEC common stock.
The Company applied the acquisition method of accounting to CEC’s business, whereby the excess of the acquisition date fair value of consideration transferred over the fair value of identifiable net assets was allocated to goodwill. Goodwill reflects workforce and synergies expected from cost savings, operations, and revenue enhancements of the combined company that are expected to result from the acquisition. The goodwill recorded as part of the merger was allocated to the Strayer University and Capella University reportable segments in the amount of $330.6 million and $394.7 million, respectively, and is not deductible for tax purposes. The Company incurred $20.1 million of acquisition-related costs which are included in Merger and integration costs in the unaudited condensed consolidated statements of income. Issuance costs of $0.1 million were recognized in additional paid-in capital in the unaudited condensed consolidated balance sheets. During the three months ended September 30, 2019, the Company finalized the fair value of assets acquired and liabilities assumed. Measurement period adjustments were reflected in the periods in which the adjustments occurred. During the three months ended December 31, 2018, the Company recorded measurement period adjustments that reduced cash and cash equivalents, other assets, and deferred income taxes by $0.5 million, $1.4 million, and $0.1 million, respectively. These adjustments resulted in a $1.8 million increase to goodwill recognized in connection with the CEC merger during the three months ended December 31, 2018. During the nine months ended September 30, 2019, the Company recorded measurement period adjustments that reduced deferred income taxes and current assets by $3.8 million and $1.9 million, respectively, and increased current liabilities and long-term liabilities by $1.3 million and $0.1 million, respectively. These adjustments resulted in a $0.5 million decrease to goodwill recognized in connection with the CEC merger during the nine months ended September 30, 2019. All measurement period adjustments are reflected in the fair value of assets acquired and liabilities assumed in the table below. The fair value of assets acquired and liabilities assumed, as well as a reconciliation to consideration transferred, is presented in the table below (in thousands):
Cash and cash equivalents | $ | 167,859 |
Marketable securities | 31,419 |
Tuition receivable | 36,716 |
Income taxes receivable | 163 |
Other current assets | 9,041 |
Marketable securities, non-current | 34,700 |
Property and equipment, net | 53,182 |
Other assets | 14,556 |
Intangible assets | 349,800 |
Goodwill | 725,275 |
Total assets acquired | 1,422,711 |
Accounts payable and accrued expenses | (48,103 | )
Contract liabilities | (39,000 | )
Deferred income taxes | (96,320 | )
Other long-term liabilities | (2,327 | )
Total liabilities assumed | (185,750 | )
Total consideration | $ | 1,236,961 |
The table below presents a summary of intangible assets acquired (in thousands) and the weighted average useful lives of these assets:
| Fair Value |  | Weighted Average Useful Life in Years
Trade names | $ | 183,800 |  |  | Indefinite
Student relationships | 166,000 |  |  | 3
| $ | 349,800 |  |  |
The Company determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the assets and liabilities. The Company utilized the following assumptions, some of which include significant unobservable inputs which would qualify the valuations as Level 3 measurements, and valuation methodologies to determine fair value:
• | Intangible assets - To determine the fair value of the trade name, the Company used the relief from royalty approach. The excess earnings method was used to estimate the fair value of student relationships.
• | Property and equipment - Included in property and equipment is course content of $14.0 million, valued using the relief from royalty approach, and internally developed software of $5.0 million, valued using the cost approach. Each will be amortized over three years. All other property and equipment was valued at estimated cost.
• | Contract liabilities - The Company estimated the fair value of contract liabilities using the cost build-up method, which represents the cost to deliver the services plus a normal profit margin.
• | Other current and noncurrent assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.
The operations of CEC were included in the consolidated financial statements as of the acquisition date. The revenue and net loss for CEC reported within the consolidated financial statements for the three and nine months ended September 30, 2018 were $46.1 million and $43.1 million, respectively. Pro Forma Financial Information The following unaudited pro forma information has been presented as if the CEC acquisition occurred on January 1, 2017. The information is based on the historical results of operations of the acquired business, adjusted for:
• | The allocation of purchase price and related adjustments, including the adjustments to amortization expense related to the fair value of intangible assets acquired;
• | The exclusion of acquisition-related costs incurred during the three and nine months ended September 30, 2018;
• | Associated tax-related impacts of adjustments; and
• | Changes to align accounting policies.
The pro forma results do not necessarily represent what would have occurred if the acquisition had actually taken place on January 1, 2017, nor do they represent the results that may occur in the future. The pro forma adjustments are based on available information and upon assumptions that the Company believes are reasonable to reflect the impact of this acquisition on the Company’s historical financial information on a supplemental pro forma basis. The following table presents the Company's pro forma combined revenues and net income (in thousands). Pro forma results for the three and nine months ended September 30, 2019 are not presented below because the results of CEC are included in the Company's September 30, 2019 unaudited condensed consolidated statement of income.
| Three Months Ended September 30, 2018 |  | Nine Months Ended September 30, 2018
Revenue | $ | 224,641 |  |  | $ | 679,309 |
Net income (loss) | (14,146 | ) |  | 10,606 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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