Quarterly report pursuant to Section 13 or 15(d)

Business Combinations

v3.20.2
Business Combinations
 9 Months Ended
Sep. 30, 2020
Business Combinations [Abstract]  
Business Combination Disclosure Business Combinations
Acquisition of the WiFi and Broadband assets business
On July 31, 2020, the Company and certain of its designated subsidiaries completed their acquisition of the Home Gateway Platform Division, which the Company refers to as the WiFi and Broadband assets business, pursuant to an Asset Purchase Agreement with Intel Corporation, or Intel, dated April 5, 2020 (the “Asset Purchase Agreement”), and related agreements. The Company paid cash consideration of $150.0 million for the purchase of certain assets of the WiFi and Broadband assets business, and assumed certain liabilities related to specified employment matters. The transaction was funded with a portion of the net proceeds from a secured incremental term loan with an aggregate principal amount of $175.0 million (Note 8).
The WiFi and Broadband assets business develops a broad portfolio of connected home products, including WiFi, Ethernet and Broadband Gateway Processor SoCs, which enables the Company to strengthen its existing connected home portfolio by bringing together a complete, scalable, and complementary platform of connectivity and access solutions to address its customers’ needs across target end-markets.
The acquired assets and assumed liabilities, together with the employees who joined the Company and its subsidiaries as a result of the transaction, represent a business as defined in ASC 805, Business Combinations. The Company is integrating the acquired assets and rehired employees into the Company’s existing business.
The Asset Purchase Agreement also contains customary representations, warranties and covenants, including indemnification provisions set forth therein. Pursuant to the Purchase Agreement, Intel has retained, and will be obligated to indemnify MaxLinear for, certain liabilities, including but not limited to those relating to the Home Gateway Platform Division for pre-closing taxes and specified employment matters, and MaxLinear has assumed, and will indemnify Intel for, certain liabilities, including but not limited to those relating to the Home Gateway Platform Division and the Transferred Assets for certain pre-closing and post-closing actions, events and periods (including certain product-related liabilities for products sold prior to the Closing for up to a $25.0 million cap), and specified employment matters.

In connection with the transaction, the Company and Intel have entered into as of the closing certain other ancillary agreements, including (i) an intellectual property matters agreement, pursuant to which Intel will grant to the Company a license to certain intellectual property rights for use by the Company in connection with the acquired assets and the Company will grant back to Intel a license to the intellectual property rights in the acquired assets, (ii) a supply agreement, pursuant to which Intel will manufacture and fabricate certain products for the Company that are part of the acquired assets, (iii) an ethernet network controller services agreement, pursuant to which the Company will provide Intel with certain development services with respect to certain Intel ethernet network controller products, (iv) a transition services agreement, pursuant to which Intel will provide certain services on a transitional basis for up to a 12-month period after the closing, the scope of which includes services relating to real estate and facilities, information technology, and supply chain, procurement, sales operations, and engineering support, and (v) a side letter regarding the delayed transfer of certain inventory. Pursuant to the delayed inventory side letter, the Company has control and economic benefits of the inventory, but the title and possession of the inventory has been delayed until the last day that Intel provides services under the transition services agreement.
Acquisition Consideration

The following table summarizes the fair value of purchase price consideration to acquire the WiFi and Broadband assets business (in thousands):

Description Amount
Fair value of purchase consideration:
Cash $ 150,000 

Preliminary Purchase Price Allocation

The following is an allocation of purchase price as of the July 31, 2020 acquisition closing date based upon a preliminary estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition (in thousands):
Description Amount
Preliminary purchase price allocation:
Inventory $ 67,100 
Property and equipment, net 17,641 
Identifiable intangible assets 58,000 
Accrued expenses (68)
Accrued compensation (7,916)
Other long-term liabilities (8,197)
Identifiable net assets acquired 126,560 
Goodwill 23,440 
Total purchase price $ 150,000 
The fair value of inventories acquired with the WiFi and Broadband assets business included an acquisition accounting fair market value step-up of $32.9 million. The Company recognized $14.4 million in amortization of inventory step-up in cost of sales in the consolidated statements of operations for the three and nine months ended September 30, 2020.
The following is a summary of identifiable intangible assets acquired and the related expected lives for the finite-lived intangible assets (in thousands):
Category Estimated Life in Years Fair Value
Finite-lived intangible assets:
Developed technology 7 $ 43,200 
Customer-related intangible 5 6,800 
Product backlog 0.58 800 
50,800 
Indefinite-lived intangible assets:
IPR&D N/A 7,200 
Total identifiable intangible assets acquired $ 58,000 
Acquisition of NanoSemi, Inc.
On September 9, 2020, the Company completed its acquisition of NanoSemi, Inc. or NanoSemi, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) with NanoSemi, dated September 9, 2020. The initial closing transaction consideration consisted of $10.0 million in cash and 804,163 shares of MaxLinear’s common stock. In addition, the NanoSemi securityholders will receive $35.0 million in deferred cash payments payable in 2021, and certain NanoSemi securityholders may also receive up to an additional $35.0 million in potential contingent consideration, subject to the acquired business’s satisfying certain financial objectives from July 1, 2020 through December 31, 2022. The stock consideration was issued in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended. In connection with the acquisition, MaxLinear agreed to provide the NanoSemi stockholders with certain registration rights with respect to the shares of MaxLinear common stock they received in the acquisition.
NanoSemi is an industry-leading provider of intellectual property that utilizes patented machine learning techniques to improve signal integrity and power efficiency in systems-on-chip, or SoCs, application-specific integrated circuits, or ASICs, and field-programmable gate arrays, or FPGAs, used in next-generation communication and artificial intelligence systems. Its technology enables higher throughput connections for 5G, Wi-Fi, and WiGig smartphones and base stations while simultaneously reducing energy consumption.
Acquisition Consideration
The following table summarizes the fair value of purchase price consideration to acquire NanoSemi (in thousands):
Description Amount
Fair value of purchase consideration:
Cash $ 10,000 
Common stock issued(1)
17,080 
Deferred payments(2)
34,100 
Contingent consideration(3)
3,800 
Total purchase price $ 64,980 
_________________
(1) The fair value of common stock issued in the merger is based on 804,163 shares issued on the September 9, 2020 acquisition date at the closing price of the Company’s common stock of $21.24 per share.
(2) The fair value of the deferred payments was determined by discounting to present value payments totaling $35.0 million expected to be made to NanoSemi securityholders throughout 2021.
(3) The fair value of contingent consideration is based on applying the Monte Carlo simulation method to forecast achievement under various contingent consideration events which may result in up to $35.0 million in payments subject to the acquired business’s satisfying certain financial objectives from July 1, 2020 through December 31, 2022, under the Merger Agreement. Key inputs in the valuation include forecasted revenue, revenue volatility and discount rate. Underlying forecast mathematics were based on Geometric Brownian Motion in a risk-neutral framework and discounted back to the applicable period in which the accumulative thresholds were achieved at discount rates commensurate with the risk and expected payout term of the contingent consideration.
Preliminary Purchase Price Allocation
The following is an allocation of purchase price as of the September 9, 2020 acquisition closing date based upon a preliminary estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition (in thousands):
Description Amount
Preliminary purchase price allocation:
Accounts receivable, net $ 175 
Prepaid expenses and other current assets 774 
Property and equipment, net 177 
Leased right-of-use assets 1,805 
Intangible assets, net 30,300 
Accounts payable (602)
Accrued expenses and other current liabilities (323)
Accrued compensation (223)
Long-term lease liabilities (1,546)
Other long-term liabilities (6,363)
Identifiable net assets acquired 24,174 
Goodwill 40,806 
Total purchase price $ 64,980 
The following is a summary of identifiable intangible assets acquired and the related expected lives for the finite-lived intangible assets (in thousands):
Category Estimated Life in Years Fair Value
Finite-lived intangible assets:
Developed technology 7 $ 24,400 
Trademarks and tradenames 7 1,200 
Customer-related intangible 5 3,000 
Product backlog 5.33 1,700 
Total identifiable intangible assets acquired $ 30,300 
Assumptions in the Allocations of Purchase Price

Management prepared the purchase price allocations for the WiFi and Broadband assets business and NanoSemi, and in doing so considered or relied in part upon reports of a third party valuation expert to calculate the fair value of certain acquired assets, which primarily included identifiable intangible assets, inventory, and property and equipment, and the portions of the purchase consideration for NanoSemi expected to be paid to NanoSemi securityholders in the future, as described above. Certain NanoSemi securityholders that are employees are not required to remain employed in order to receive the deferred payments and contingent consideration; accordingly, the fair value of the deferred payments and contingent consideration have been accounted for as a portion of the purchase consideration.

Estimates of fair value require management to make significant estimates and assumptions which are preliminary and subject to change upon finalization of the valuation analysis. The goodwill recognized is attributable primarily to the acquired workforce, expected synergies, and other benefits that MaxLinear believes will result from integrating the operations of the WiFi and Broadband assets business and NanoSemi with the operations of MaxLinear. Certain liabilities included in the purchase price allocations are based on management’s best estimates of the amounts to be paid or settled and based on information available at the time the purchase price allocations were prepared. Updates to and/or completion of the valuations of certain assets acquired and liabilities assumed and our evaluation of certain income tax positions may result in changes to the recorded amounts of assets and liabilities, with corresponding adjustments to goodwill amounts in subsequent periods. We expect to complete the purchase price allocations within 12 months of the respective acquisition dates.
The fair value of the identified intangible assets acquired from the WiFi and Broadband assets business and NanoSemi was estimated using an income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. More specifically, the fair value of the developed technology, IPR&D and backlog assets was determined using the multi-period excess earnings method, or MPEEM. MPEEM is an income approach to fair value measurement attributable to a specific intangible asset being valued from the asset grouping’s overall cash-flow stream. MPEEM isolates the expected future discounted cash-flow stream to its net present value. Significant factors considered in the calculation of the developed technology and IPR&D intangible assets were the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on core technology, the existence of any alternative future use or current technological feasibility and the complexity, cost, and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration, and growth rates. Developed technology will begin amortization immediately and IPR&D will begin amortization upon the completion of each project. If any of the projects are abandoned, the Company will be required to impair the related IPR&D asset.

In connection with the acquisition of the WiFi and Broadband assets business, the Company has assumed liabilities which primarily consist of accrued employee compensation and benefits in jurisdictions where such transfer is required either by law or by work council agreement. In connection with the acquisition of NanoSemi, the Company assumed certain operating liabilities. The liabilities assumed in these acquisitions are included in the respective purchase price allocations above.

Goodwill recorded in connection with the WiFi and Broadband assets business and NanoSemi was $23.4 million and $40.8 million, respectively. The Company does not expect to deduct any of the acquired goodwill for tax purposes.

Proforma Combined Financial Information

The following table presents unaudited pro forma combined financial information for each of the periods presented, as if the acquisitions of the WiFi and Broadband assets business and NanoSemi had occurred at the beginning of fiscal year 2019:

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Net revenue – proforma combined $ 219,419  $ 181,438  $ 508,449  $ 541,067 
Net income (loss) – proforma combined $ (17,324) $ (23,470) $ (103,108) $ (126,340)


    The following adjustments were included in the unaudited pro forma combined net revenues:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Net revenue $ 156,633  $ 80,020  $ 283,880  $ 247,162 
Add: Net revenue – acquired businesses 62,786  101,418  224,569  293,905 
Net revenues – proforma combined $ 219,419  $ 181,438  $ 508,449  $ 541,067 
    The following adjustments were included in the unaudited pro forma combined net loss:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Net loss $ (36,645) $ (4,714) $ (73,921) $ (11,794)
Add: Results of operations – acquired businesses (3,875) (22,075) (63,882) (75,994)
Less: Proforma adjustments
Depreciation of property and equipment 2,101  934  4,358  948 
Amortization of intangible assets 1,615  3,923  10,119  11,369 
Amortization of inventory step-up 14,445  —  14,445  (32,945)
Acquisition and integration expenses 7,471  —  12,803  (12,803)
Interest expense (571) (2,120) (6,202) (6,488)
Other expense 82  324  1,867  2,287 
Income taxes 762  258  14  (920)
Net loss – proforma combined $ (14,615) $ (23,470) $ (100,399) $ (126,340)
Net loss per share – proforma combined:
Basic $ (0.20) $ (0.33) $ (1.37) $ (1.77)
Diluted $ (0.20) $ (0.33) $ (1.37) $ (1.77)
Shares used to compute net loss per share – proforma combined:
Basic 74,023  72,170  73,472  71,557 
Diluted 74,023  72,170  73,472  71,557 


    The pro forma combined financial information for the three months ended September 30, 2020 includes aggregate non-recurring adjustments of $0.4 million consisting of amortization of intangible assets for which the related assets have useful lives of less than one year. The pro forma combined financial information for the nine months ended September 30, 2020 includes aggregate non-recurring adjustments of $34.5 million consisting of amortization of inventory step-up and intangible assets of $32.9 million and $1.6 million, respectively, for which the related assets have useful lives of less than one year.

The pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations of the consolidated business had the acquisitions actually occurred at the beginning of fiscal year 2019 or of the results of future operations of the consolidated business. The unaudited pro forma financial information does not reflect any operating efficiencies and cost saving that may be realized from the integration of the acquisitions in the Company's unaudited consolidated statements of operations.

For the three and nine months ended September 30, 2020, $82.5 million of revenue and $41.8 million of gross profit, excluding $15.8 million of amortization of acquired intangible assets and the inventory fair-value step-up of the WiFi and Broadband assets business and NanoSemi since the acquisition date, are included in the Company's consolidated statements of operations.

Acquisition and integration-related costs of $7.5 million and $12.8 million related to the acquisitions of the WiFi and Broadband assets business and NanoSemi were included in selling, general, and administrative expenses in the Company's statements of operations for the three and nine months ended September 30, 2020, respectively.