Note 16: Acquisitions

On June 4, 2012 (“the acquisition date”), the Company acquired all of the outstanding common shares of Novellus in an all-stock transaction valued at approximately $3.0 billion. The results of Novellus’ operations have been included in the consolidated financial statements for the period from June 4, 2012 to June 24, 2012. Lam’s primary reasons for this acquisition were to complement existing product offerings and to provide opportunities for revenue and cost synergies. Novellus’ primary business focus is to develop, manufacture, sell and support equipment used in the fabrication of integrated circuits, commonly called semiconductors. Customers for this equipment manufacture semiconductors for sale or for incorporation in their own products, or provide semiconductor-manufacturing services to third parties. Novellus also develops, manufactures, sells and supports grinding, lapping and polishing equipment for a broad spectrum of industrial applications.

As a result of the acquisition, Lam Research issued common stock and equity-based awards, subject to certain exceptions, as follows:

 

(i)

each issued and outstanding share of common stock of Novellus was converted into 1.125 (the “exchange ratio”) shares of Lam Research common stock, with cash paid in lieu of fractional shares;

 

(ii)

each outstanding option for Novellus’ common stock held by a then-current employee of Novellus, whether vested or unvested, was assumed by Lam Research and converted into an option (A) to acquire that number of shares of Lam Research common stock (rounded down to the nearest whole share) equal to the product of (x) the number of shares of Novellus common stock for which such option was exercisable immediately prior to the acquisition date multiplied by (y) the exchange ratio and (B) with an exercise price per share of Lam Research (rounded up to the nearest whole penny) equal to the quotient obtained by dividing (z) the exercise price per share of Novellus common stock subject to such option immediately prior to the acquisition date divided by (y) the exchange ratio. Each assumed stock option will be subject to, and exercisable and vested on, the same terms and conditions applicable to such assumed stock option (consistent with the terms of the applicable Novellus stock plan, the applicable stock option agreement and any other applicable Novellus plan) as of immediately prior to the acquisition date; and

 

(iii)

each outstanding Novellus RSU and each outstanding Novellus performance-based RSU (“PSU”) held by a then-current employee of Novellus, whether vested or unvested, was assumed by Lam Research and converted into a restricted stock unit to acquire the number of shares of Lam Research common stock (rounded down to the nearest whole share) equal to the product obtained by multiplying (x) the number of shares of Novellus common stock subject to such RSU or PSU, as applicable, immediately prior to the acquisition date by (y) 1.125. Novellus PSUs that vest in connection with the consummation of the acquisition will become fully vested with respect to the maximum number of shares of Novellus common stock payable pursuant to such Novellus PSU. Each assumed RSU or PSU, as applicable, will be subject to, and vested on, the same terms and conditions applicable to such assumed RSU or PSU.

Consideration Transferred

The table below details the consideration transferred to acquire Novellus:

 

		Conversion				Estimated
(in thousands, except per share amounts)		Calculation				Fair Value
Lam common stock issued at merger			82,689
Per share price of Lam common stock as of June 4, 2012		$	35.99			$	2,975,977
Estimated fair value of vested Lam equivalent restricted stock (1)						$	9,599
Estimated fair value of vested Lam equivalent stock options (2)							41,412
Estimated purchase price consideration						$	3,026,988

 

(1)	The fair value of Lam Research equivalent restricted stock as of the acquisition date was estimated based upon the per share price of Lam Research common stock as of June 4, 2012, and giving effect to the exchange ratio of 1.125.

(2)	The fair value of the Lam Research equivalent stock options as of the acquisition date was estimated using the Black-Scholes valuation model. Assumptions used are the same as those for acquired awards as disclosed in Note 11 of Notes to Consolidated Financial Statements.

 

Net Assets Acquired

The transaction has been accounted for using the acquisition method of accounting which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the assets acquired and liabilities assumed as of the acquisition date:

 

		June 4, 2012
		(in thousands)
Cash and investments		$	1,059,859
Accounts receivable			241,924
Inventory			309,213
Other current assets			55,502
Property and equipment			289,126
Intangible assets			1,219,100
Goodwill			1,283,111
Other long-term assets			36,494
Total assets acquired			4,494,329
Accounts payable			(83,028	)
Accrued expenses and other current liabilities			(199,262	)
Deferred revenue			(20,388	)
Debt			(509,805	)
Other long-term liabilities			(326,732	)
Convertible notes - equity component			(328,126	)
Net assets acquired		$	3,026,988

The following table is a summary of the fair value estimates of the identifiable intangible assets and their useful lives:

 

		Useful Life		Estimated Fair Value June 4, 2012
		(in thousands, except years)
Existing technology		7		$	580,000
Customer relationships		6-10			580,000
In-process research and design		Indefinite			30,000
Patents		6			10,000
Backlog		1			10,000
Additional development rights		Indefinite			9,100
Total				$	1,219,100

Critical estimates in valuing certain intangible assets include but are not limited to estimating future expected cash flows from assets acquired and determining discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available.

With respect to the acquisition of Novellus, acquired intangibles primarily included existing technology and customer relationships. Existing technology represents the underlying hardware, software, robotics, chemical and mechanical processes embedded in the various tools, which have passed technological feasibility. Existing technology was valued using the relief from royalty method, a form of the income approach. The relief from royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. The value of the intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset.

 

Customer relationships have value when they represent an identifiable and predictable source of cash flows to the combined business enterprise. Customer relationships that resulted in repeat purchases and customer loyalty were valued using the multiperiod excess earning method, a form of the income approach. The estimated fair value of the customer contracts and related relationships represents the sum of the present value of the expected cash flows attributable to those customer relationships. The cash flows were determined from the revenue and profit forecasts associated with existing contracts and renewals, as well as add-ons and growth opportunities that are expected to be generated from these customer relationships.

The goodwill recognized is attributable primarily to expected synergies and other benefits that the Company believes will result from combining the operations of Novellus with the operations of Lam. The $1.3 billion goodwill that was acquired is not expected to be deductible for income tax purposes. As of June 30, 2013 there are no remaining preliminary purchase price allocations and the measurement period is considered closed.

Acquisition Costs

The Company recognized $36 million of acquisition related costs that were expensed in the year ended June 24, 2012. These costs are included within selling, general, and administrative expense in the Consolidated Statement of Operations.

Actual and Pro-forma Results

The amounts of revenue and net income (loss) of Novellus included in the Company’s consolidated Statement of Operations from the acquisition date to June 24, 2012 are as follows:

 

		(in thousands)
Revenue		$	25,843
Net income (loss)		$	(29,187	)

The unaudited pro-forma results presented below include the effects of the Novellus acquisition as if it had been consummated as of June 28, 2010. The pro forma results below include adjustments related to conforming revenue accounting policies, depreciation and amortization to reflect the fair value of acquired property, plant and equipment and identifiable intangible assets, and the associated income tax impacts. The pro forma results for the years ended June 24, 2012 include $122 million of costs related to inventory fair value adjustments on products sold, share-based compensation associated with accelerated vesting and acquisition-related costs, which are not expected to occur in future quarters. The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at the beginning of the fiscal reporting period indicated nor is it indicative of future operating results. The pro forma information does not include any adjustment for (i) potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition or (ii) transaction or integration costs relating to the acquisition.

 

		Year Ended
		June 24,     2012				June 26,     2011
		(in thousands, except per share amounts)
Pro forma revenue		$	3,804,252			$	4,743,797
Pro forma net income		$	152,981			$	894,864
Pro forma basic earnings per share		$	0.76			$	4.34
Pro forma diluted earnings per share		$	0.74			$	4.18