Note 3 Acquisitions

Acquisitions were as follows:

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($ in millions, except number of acquired businesses)

2013

2012

2011

(1)

Excluding changes in cost and equity investments but including $2 million in 2013, $5 million in 2012 and $19 million in 2011, representing the fair value of replacement vested stock options issued to Power-One, Thomas & Betts and Baldor employees, respectively, at the corresponding acquisition dates.

(2)

Recorded as goodwill (see Note 11). Includes adjustments of $63 million in 2013 arising during the measurement period of acquisitions, primarily reflecting a reduction in certain ­deferred tax liabilities related to Thomas & Betts.

Acquisitions (net of cash acquired)(1)

897

3,643

3,805

Aggregate excess of purchase price over fair value of net assets acquired(2)

525

2,895

3,261

Number of acquired businesses

7

9

10

In the table above, the “Acquisitions” and “Aggregate excess of purchase price over fair value of net assets acquired” amounts for 2013 relate primarily to the acquisition of Power-One Inc. (Power-One). For 2012, these amounts relate primarily to the acquisition of Thomas & Betts Corporation (Thomas & Betts), while for 2011, these amounts relate mainly to the acquisitions of Baldor Electric Corporation (Baldor) and EAM Software Holdings Pty Ltd (Mincom).

Acquisitions of controlling interests have been accounted for under the acquisition method and have been included in the Company’s Consolidated Financial Statements since the date of acquisition.

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, the purchase price allocation for acquisitions is preliminary for up to 12 months after the acquisition date and is subject to refinement as more detailed analyses are completed and additional information about the fair values of the assets and liabilities becomes available.

On July 25, 2013, the Company acquired all outstanding shares of Power-One for $6.35 per share in cash. The resulting cash outflows for the Company amounted to $737 million, representing $705 million for the purchase of the shares (net of cash acquired) and $32 million related to the cash settlement of Power-One stock options held at the acquisition date. Power-One is a designer and manufacturer of photovoltaic inverters, as well as a provider of renewable energy and energy-efficient power conversion and power management solutions.

The aggregate preliminary allocation of the purchase consideration for business acquisitions in 2013, was as follows:

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($ in millions)

Allocated amounts(1)

Weighted-average useful life

(1)

Excludes measurement period adjustments related to prior year acquisitions.

(2)

The Company does not expect the majority of goodwill recognized to be deductible for income tax purposes.

Intangible assets

206

7 years

Fixed assets

135

 

Deferred tax liabilities

(190)

 

Other assets and liabilities, net

158

 

Goodwill(2)

588

 

Total consideration (net of cash acquired)

897

 

On May 16, 2012, the Company acquired all outstanding shares of Thomas & Betts for $72 per share in cash. The resulting cash outflows for the Company amounted to $3,700 million, representing $3,282 million for the purchase of the shares (net of cash acquired of $521 million), $94 million related to cash settlement of Thomas & Betts stock options held at acquisition date and $324 million for the repayment of debt assumed upon acquisition. Thomas & Betts designs, manufactures and markets components used to manage the connection, distribution, transmission and reliability of electrical power in industrial, construction and utility applications. The acquisition of Thomas & Betts supports the Company’s strategy of expanding its Low Voltage Products operating segment into new geographies, sectors and products, and consequently the goodwill acquired represents the future benefits associated with the expansion of market access and product scope.

The final allocation of the purchase consideration for the Thomas & Betts acquisition in 2012 was as follows:

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($ in millions)

Allocated amounts

Weighted-average useful life

(1)

Gross receivables from the acquisition totaled $387 million; the fair value of which was $344 million after rebates and allowance for estimated uncollectable receivables.

(2)

Goodwill recognized is not deductible for income tax purposes.

(3)

Cash acquired in the acquisition totaled $521 million. Additional consideration for the acquisition included $94 million related to the cash settlement of stock options held by Thomas & Betts employees at the acquisition date and $5 million representing the fair value of replacement vested stock options issued to Thomas & Betts employees at the acquisition date. The fair value of these stock options was estimated using a Black-Scholes model.

Customer relationships

1,169

18 years

Technology

179

5 years

Trade names

155

10 years

Order backlog

12

7.5 months

Intangible assets

1,515

15 years

Fixed assets

458

 

Debt acquired

(619)

 

Deferred tax liabilities

(971)

 

Inventories

300

 

Other assets and liabilities, net(1)

49

 

Goodwill(2)

2,649

 

Total consideration (net of cash acquired)(3)

3,381

 

The Company’s Consolidated Income Statement for 2012 includes total revenues of $1,541 million and a net loss (including acquisition-related charges) of $10 million in respect of Thomas & Betts since the date of acquisition.

The unaudited pro forma financial information in the table below summarizes the combined pro forma results of the Company and Thomas & Betts for 2012 and 2011, as if Thomas & Betts had been acquired on January 1, 2011.

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($ in millions)

2012

2011

Total revenues

40,251

40,288

Income from continuing operations, net of tax

2,924

3,381

The unaudited pro forma results above include certain adjustments related to the Thomas & Betts acquisition. The table below summarizes the adjustments necessary to present the pro forma financial information of the Company and Thomas & Betts combined, as if Thomas & Betts had been acquired on January 1, 2011.

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Adjustments

($ in millions)

2012

2011

Impact on cost of sales from additional amortization of intangible assets
(excluding order backlog capitalized upon acquisition)

(26)

(69)

Impact on cost of sales from amortization of order backlog capitalized upon acquisition

11

(12)

Impact on cost of sales from fair valuing acquired inventory

31

(31)

Impact on cost of sales from additional depreciation of fixed assets

(12)

(33)

Interest expense on Thomas & Betts debt

5

21

Impact on selling, general and administrative expenses from Thomas & Betts stock-option plans adjustments

16

Impact on selling, general and administrative expenses from acquisition-related costs

56

(20)

Impact on interest and other finance expense from bridging facility costs

13

Other

(5)

(15)

Income taxes

(7)

44

Total pro forma adjustments

82

(115)

The pro forma results are for information purposes only and do not include any anticipated cost synergies or other effects of the planned integration of Thomas & Betts. Accordingly, such pro forma amounts are not necessarily indicative of the results that would have occurred had the acquisition been completed on the date indicated, nor are they indicative of the future operating results of the combined company.

The aggregate allocation of the purchase consideration for other business acquisitions in 2012, excluding Thomas & Betts, was as follows:

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($ in millions)

Allocated amounts

Intangible assets

68

Fixed assets

25

Deferred tax liabilities

(24)

Other assets and liabilities, net

21

Goodwill

172

Total consideration (net of cash acquired)

262

On January 26, 2011, the Company acquired 83.25 percent of the outstanding shares of Baldor for $63.50 per share in cash. On January 27, 2011, the Company exercised its top-up option contained in the merger agreement, bringing its shareholding in Baldor to 91.6 percent, allowing the Company to complete a short-form merger under Missouri, United States, law. On the same date, the Company completed the purchase of the remaining 8.4 percent of outstanding shares. The resulting cash outflows for the Company amounted to $4,276 million, representing $2,966 million for the purchase of the shares (net of cash acquired), $70 million related to cash settlement of Baldor options held at acquisition date and $1,240 million for the repayment of debt assumed upon acquisition. Baldor markets, designs and manufactures industrial electric motors, mechanical power transmission products, drives and generators.

The final allocation of the purchase consideration for the Baldor acquisition in 2011 was as follows:

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($ in millions)

Allocated amounts

Weighted-average
useful life

(1)

Gross receivables from the acquisition totaled $266 million; the fair value of which was $263 million after allowance for estimated uncollectable receivables.

(2)

The goodwill recognized is not deductible for income tax purposes.

(3)

Cash acquired in the acquisition totaled $48 million. Additional consideration included $70 million related to the cash settlement of stock options held by Baldor employees at the acquisition date and $19 million representing the fair value of replacement vested stock options issued to Baldor employees at the acquisition date. The fair value of these stock options was estimated using a Black-Scholes model.

Customer relationships

996

19 years

Technology

259

7 years

Trade name

121

10 years

Order backlog

15

2 months

Other intangible assets

15

5 years

Intangible assets

1,406

16 years

Fixed assets

382

 

Debt acquired

(1,241)

 

Deferred tax liabilities

(693)

 

Inventories

422

 

Other assets and liabilities, net(1)

51

 

Goodwill(2)

2,728

 

Total consideration (net of cash acquired)(3)

3,055

 

The Company’s Consolidated Income Statement for 2011 includes total revenues of $1,950 million and net income (including acquisition-related charges) of $155 million in respect of Baldor since the date of acquisition.

The aggregate allocation of the purchase consideration for business acquisitions in 2011, excluding Baldor, was as follows:

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($ in millions)

Allocated amounts(1)

(1)

The allocated amounts primarily relate to the acquisitions of Mincom, PGC Powergen Consulting SA (Trasfor) and AB Lorentzen & Wettre.

(2)

Includes debt acquired of $202 million.

Intangible assets

447

Fixed assets

40

Deferred tax liabilities

(99)

Other assets and liabilities, net(2)

(171)

Goodwill

533

Total consideration (net of cash acquired)

750