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Omneon Acquisition
9 Months Ended
Sep. 30, 2011
Omneon Acquisition [Abstract] 
OMNEON ACQUISITION

NOTE 3: OMNEON ACQUISITION

On September 15, 2010, Harmonic completed the acquisition of 100% of the equity interests of Omneon, Inc., a privately-held company organized under the laws of Delaware and headquartered in Sunnyvale, California. Omneon develops and supports a range of video servers, active storage systems and related software applications that media companies use to simultaneously ingest, process, store, manage and deliver digital media in a wide range of formats. When used for television production and on-air operations, the products are designed to provide continuous real-time record and playback capabilities, as well as file-based access to, and delivery of, digital media content. Omneon’s products include Spectrum video servers, MediaGrid active storage systems, Media Application servers and other software applications that were initially designed for, and have been deployed mostly by, broadcasters that use Omneon’s products for the production and transmission of television content.

The acquisition of Omneon was intended to strengthen Harmonic’s competitive position in the digital media market and to broaden the Company’s relationships with customers that produce and distribute digital video content, such as broadcasters, satellite operators, content owners and other media companies. The acquisition was also intended to broaden Harmonic’s technology and product lines with digital storage and playout solutions that complement Harmonic’s existing video processing products. In addition, the acquisition provided an assembled workforce and the implicit value of future cost savings as a result of combining entities, and was expected to provide Harmonic with future, but then unidentified, new products and technologies. These opportunities were significant factors to the establishment of the purchase price, which exceeded the fair value of Omneon’s net tangible and intangible assets acquired, resulting in goodwill of approximately $147.8 million that was recorded in connection with this acquisition.

The purchase price, net of $40.5 million of cash acquired, was $251.3 million, which consisted of (i) approximately $153.3 million in cash, net of cash acquired, (ii) 14.2 million shares of Harmonic common stock with a total fair value of approximately $95.9 million, based on the price of Harmonic common stock at the time of close, and (iii) approximately $2.1 million, representing the fair value attributed to shares of Omneon equity awards which Harmonic assumed and for which services had already been rendered as of the close of the acquisition. The cash portion of the purchase price was paid from existing cash balances. The Company also incurred a total of $5.9 million of transaction expenses, which were expensed as selling, general and administrative expenses in the year ended December 31, 2010.

The assets and liabilities of Omneon shown in the purchase price allocation below were recorded at fair value at the date of acquisition. The Company has continued to evaluate certain assets and liabilities as new information was obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date. Changes to the assets and liabilities recorded resulted in a corresponding adjustment to goodwill. The measurement period for such changes terminated one year from the acquisition date. Further, any associated restructuring activities will be expensed in future periods and not recorded through purchase accounting as previously done under prior accounting guidance. There are no contingent consideration arrangements in connection with the acquisition.

 

The results of operations of Omneon are included in Harmonic’s Consolidated Statements of Operations from September 15, 2010, the date of acquisition. The following table summarizes the final allocation of the purchase price based on the fair value of the assets acquired and the liabilities assumed at the date of acquisition:

 

                 
    (In thousands)  

Cash acquired

           $ 40,485  

Accounts receivable (Gross amount due from accounts receivable of $17,760)

             17,055  

Inventory

             11,010  

Fixed assets

             12,093  

Deferred income tax assets

             18,021  

Other tangible assets acquired

             3,294  

Intangible assets:

                

Existing technology

   $ 50,800          

In-process technology

     9,000          

Patents/core technology

     9,800          

Customer contracts and related relationships

     29,200          

Trademarks and tradenames

     4,000          

Maintenance agreements and related relationships

     5,500          

Order backlog

     800          
   

 

 

          
              109,100  

Goodwill

             147,750  
           

 

 

  

Total assets acquired

             358,808  

Accounts payable

             (6,829 ) 

Deferred revenue

             (6,399 ) 

Deferred income tax liabilities

             (42,575 ) 

Other accrued liabilities

             (11,203 ) 
           

 

 

  

Net assets acquired

             291,802  

Less: cash acquired

             (40,485 ) 
           

 

 

  

Net purchase price

           $ 251,317  
           

 

 

  

The purchase price set forth in the table above was allocated based on the fair value of the tangible and intangible assets acquired, and liabilities assumed, as of September 15, 2010. The Company used an overall discount rate of 15% to estimate the fair value of the intangible assets acquired, which was derived based on financial metrics of comparable companies operating in Omneon’s industry. In determining the appropriate discount rates to use in valuing each of the individual intangible assets, the Company adjusted the overall discount rate giving consideration to the specific risk factors of each asset. The following methods were used to value the identified intangible assets:

 

  •  

The fair value of the existing technology assets acquired was established based on their highest and best use by a market participant using the “Income Approach.” The Income Approach included an analysis of the markets, cash flows and risks associated with achieving such cash flows to calculate the fair value;

 

  •  

As of the acquisition date, Omneon was developing new versions and incremental improvements to its 3G MediaPort product, which was expected to be used in the Spectrum product line, once completed. The in-process project was at a stage of development that required further research and development to determine technical feasibility and commercial viability. The fair value of the in-process technology assets acquired was based on the valuation premise that the assets would be “In-Use” using a discounted cash flow model;

 

  •  

The fair value of patents/core technology assets acquired was established based on a variation of the Income Approach called the “Profit Allocation Method”. In the Profit Allocation Method, we estimated the value of the patents/core technology by capitalizing the profits expected to be saved because Harmonic owns the technology;

 

  •  

The fair value of the customer contracts and related relationships assets acquired was based on the Income Approach;

 

  •  

The fair value of trade names/trademarks assets acquired was established based on the Profit Allocation Method;

 

  •  

The fair value of the maintenance agreements and related relationships assets acquired was based on the Income Approach; and

 

  •  

The fair value of backlog acquired was established based on the Income Approach.

 

Identified intangible assets are being amortized over the following useful lives:

 

  •  

Existing technology is being amortized over its estimated useful life of four years;

 

  •  

In-process technology is being amortized, upon completion, over its projected remaining useful life, as assessed on the completion date. The completion of the in-process project was in the first quarter of 2011. The completed technology was estimated to have a useful life of four years;

 

  •  

Patents/core technology are being amortized over their estimated useful life of four years;

 

  •  

Customer contracts and related relationships are being amortized over their estimated useful life of six years;

 

  •  

Trade names/trademarks are being amortized over their estimated useful life of four years;

 

  •  

Maintenance agreements and related relationships are being amortized over their estimated useful life of six years; and

 

  •  

Order backlog was amortized over its estimated useful life of three and one half months.

The existing technology, patents/core technology, customer contracts and related relationships, maintenance agreements and related relationships, trade names/trademarks and backlog are amortized using the straight-line method, which reflects future projected cash flows.

The residual purchase price of $147.8 million has been recorded as goodwill. The goodwill resulting from this acquisition is not deductible for federal tax purposes.

Substantially all unvested stock options and unvested restricted stock units issued by Omneon and outstanding at closing were assumed by Harmonic. The exchange of stock-based compensation awards was treated as a modification under current accounting guidance. The calculation of the fair value of the exchanged awards immediately before and after the modification did not result in any significant incremental fair value. The fair value of Harmonic’s stock options and restricted stock units issued to Omneon employees was $17.3 million, which was determined using the Black-Scholes option pricing model, of which $2.1 million represents purchase consideration and $15.2 million will be recorded as compensation expense over the weighted average service period of 2.5 years.

Pro Forma Financial Information

The unaudited pro forma financial information presented below for the three and nine months ended October 1, 2010 summarizes the combined results of operations as if the Omneon acquisition had been completed on January 1, 2010. The unaudited pro forma financial information for the three and nine months ended October 1, 2010 combines the results for Harmonic for the three and nine months ended October 1, 2010 and the historical results of Omneon for the three and nine months ended September 30, 2010.

The pro forma financial information is presented for informational purposes only and does not purport to be indicative of what would have occurred had the merger actually been completed on such date or of results which may occur in the future.

 

                 
    Three months ended     Nine months ended  
    October 1, 2010     October 1, 2010  
    (In thousands, except per share amounts)  

Net revenue

   $ 128,198     $ 368,709  

Net loss

     (2,852 )      (4,940 ) 

Net loss per share - basic and diluted

     (0.03 )      (0.04 )