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b) Acquisition of webMethods, Inc., USA The acquisition of webMethods is intended to significantly increase the leading position of the combined companies in the growth market of Service-Oriented Architecture (SOA) and business process management (BPM). The regional strengths of Software AG and webMethods complement each other in these areas. The two companies have more than 4,000 customers and 100 partner companies, which will benefit in the future from an expanded product range. In North America in particular, Software AG will more than double its customer base. Moreover, the merger combines complementary strengths in specific customer industries with only minimal overlap in the customer bases of the two companies, thus supplying direct, mutual access to additional customer segments, especially in the areas of financial services, production, and in the public sector. The transaction builds on the excellent reputation and market position of both companies and represents a major step toward reaching Software AG’s recently announced target of doubling revenues to €1 billion in the period between 2007 and 2011. The takeover gives Software AG a leading product portfolio in the areas of SOA and BPM with outstanding breadth and depth. The portfolio includes software solutions for SOA governance & enablement, BPM, business activity monitoring, application integration, and legacy modernization.
The cost for obtaining 100 percent of the shares, including costs directly attributable to the acquisition, amounted to €416,640 thousand (USD 559,548 thousand).
Cost of the business combination: The cost of the business combination has been allocated provisionally in accordance with IFRS 3.62 as follows:
|€ thousands||Fair value as of
May 25, 2007
prior to acquisition
|Cash and cash equivalents||95,247||95,247|
|Trade receivables and other current assets||29,842||29,842|
|Software, rights, and licenses||54,796||10,021|
|Property, plant and equipment||8,959||8,959|
|Non-current financial assets||3,467||3,467|
|Deferred tax assets||31,822||6,580|
|Trade payables and other current liabilities||– 46,400||– 39,293|
|Deferred tax liabilities||– 56,643||– 683|
|Deferred income||– 16,198||– 27,218|
|Carrying amount of the assets acquired||– 150,244|
|Cost of the business combination||416,640|
Initial accounting pursuant to IFRS 3.62: As a result of the close proximity in time between the date of acquisition (May 25, 2007) and the balance sheet date of the quarterly financial statements (June 30, 2007), webMethods was initially accounted for using the provisional fair values.
Goodwill: Based on webMethod’s technology leadership in integration software and the opportunity for the new merged company to further develop and significantly increase its market share, goodwill of €230,140 thousand was initially recognized in connection with the business combination.
Software: webMethods supplies software solutions in three market segments. These are:
1. Enterprise Application Integration (EAI)
2. Service-Oriented Architecture (SOA)
3. Business Process Management (BPM)
All three of these product lines are technologically mature and are the leaders in their respective market segments. For this reason, webMethod’s technology was stated at €52,345 thousand in the opening balance sheet. In addition, “software, rights, and licenses” as presented above includes licensed software such as PC and server software in the amount of €2,451 thousand.
Customer base: The company acquired has approximately 1,400 key corporate clients. There is only minor overlap of this customer base with the customer base of Software AG, for which reason the customer base was stated at €62,993 in the opening balance sheet.
Company name: webMethod’s firm name is very well positioned and enjoys an excellent reputation in the U.S. market. Accordingly, the firm name was initially recognized at a value of €18,615 thousand.
Deferred income: Deferred income includes future maintenance revenues for which customers had already made advance payments as of the acquisition date. Based on the requirements of IFRS 3 § 36, these items have been stated in the opening balance sheet at the fair values of the future maintenance obligations. Thus measuring the cost of the business combination in accordance with IFRS resulted in a decline in revenue of €2,200 thousand for the second quarter of 2007. Revenue will decrease by an additional €6,900 thousand in the second half of 2007 and by another €1,920 thousand in fiscal 2008.
Earnings contribution since the date of acquisition: webMethods, which was acquired as of May 25, 2007, has contributed €3,418 thousand to Software AG’s net income since the date of acquisition.
Contribution to revenue and earnings since initial inclusion in the financial accounts as of
January 1, 2007: If the date of acquisition for webMethods had been January 1, 2007, Software AG’s Group revenues would have been €77,602 thousand higher and net income €8,961 thousand lower. However, these figures do not take into account the sales synergies expected.
Expenses related to the acquisition of webMethods, Inc., USA: The customer base of webMethods, which was identified as an asset in connection with the acquisition, will be amortized over a period of 12 years. The software of webMethods identified as an asset will be amortized over a period of 7 years. The company’s firm name was also recognized as an asset. However, the firm name will not be amortized as its use is not limited in time. Total amortization thus amounted to €1,055 thousand in the second quarter of 2007.
The deferred tax liabilities resulting from the accounting treatment of the customer base, software, and firm name will be reversed in line with the amortization period. Deferred tax liabilities also resulted from the reduction of deferred income. These tax liabilities will be reversed in line with the corresponding reductions in revenue. Both factors led to deferred tax earnings of €1,258 thousand in the second quarter of 2007.
As of June 30, 2007, the effective number of employees (i.e., part time employees are taken into account on a pro-rata basis only) amounted 3,719 (June 30, 2006: 2,725), 79.5 percent of whom were employed abroad (prior year: 71.3 percent). In absolute terms, i.e., with part-time employees taken into account in full, the Group employed 3,841 people (prior year: 2,828) at the end of the second quarter (June 30, 2007).
In addition to the executive area of responsibility for Crossvision, Software AG set up an additional executive area of responsibility for ETS effective January 8, 2007 for which David Broadbent is responsible. Mr. Broadbent was appointed to the Executive Board as of January 8, 2007. In addition, the sales territories of Software AG have been reallocated. In connection with the reorganization, Executive Board member Christian Barrios Marchant, previously responsible for the Southern and Western Europe/Latin America region, left the Company effective January 8, 2007.
Mr. Karl Heinz Achinger, deputy chairman of the Supervisory Board, resigned from office as of the end of the Annual Shareholders’ Meeting on May 11, 2007. Dr. Andreas Bereczky was appointed as the new deputy chairman. Mr. Alf Henryk Wulf was newly elected to the Supervisory Board as of May 11, 2007.
Mr. Reinhard Springer was not reelected to the Supervisory Board as employee representative in the elections held on April 25, 2007. He thus retired from office as of May 11, 2007. Mr. Rainer Burckhardt replaced Mr. Springer as employee representative on the Supervisory Board as of May 11, 2007.
The Supervisory Board newly appointed Mr. David Mitchell to the Executive Board effective July 27, 2007. Mr. Mitchell was previously CEO of U.S. software producer webMethods, which was taken over by Software AG as of May 25, 2007. In the future, he will be in charge of global sales for the webMethods division. This appointment marks the discontinuation of the previous regional sales structure and a continuation of the Company’s focus on the two business divisions of Enterprise Transaction Systems (ETS) and webMethods. Thus each of the two divisions has an Executive Board member in charge of development and sales. Software AG had already transformed the primary control logic of the Company from a regional focus to a focus on business divisions at the start of the year. Mr. Alfred Pfaff, previously a member of the Executive Board, will be leaving the Board by mutual consent.