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b) Acquisition of webMethods, Inc., USA The acquisition of webMethods is intended to significantly enhance 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 of acquiring 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|
|Intangible assets – software, rights, and licenses||54,796||10,021|
|Intangible assets – customer base||62,993||4,114|
|Intangible assets – company name||18,615||0|
|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||-48,038||-39,293|
|Deferred tax liabilities||-56,643||-683|
|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 (September 30, 2007), webMethods was initially accounted for using 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.
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, the item “Intangible assets – 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 was only minimal overlap with Software AG’s customer base. The customer base was, therefore, recorded in the opening balance sheet at €62,993 thousand.
Company name: webMethod’s brand name is very well positioned and enjoys an excellent reputation in the U.S. market where its products are associated with the brand name of webMethods. In order to maintain this strong link, the Crossvision product line has been renamed webMethods. The webMethods brand name is now used for distributing both the webMethods products as well as the Crossvision products. Accordingly, the company name was initially capitalized at €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, these items have been stated in the opening balance sheet at the fair value of future maintenance obligations. As a result of these influences from allocating the costs of the business combination, revenues were depressed by €6,114 thousand in the second and third quarter of 2007, of which €3,911 can be attributed to the third quarter. Revenue will decrease by an additional €2,782 thousand in the fourth quarter of 2007 and another €1,841 thousand in fiscal 2008.
Earnings contribution since the date of acquisition: webMethods, which was acquired on May 25, 2007, has contributed €10,202 thousand to Software AG’s net income since the date of acquisition, €6,784 thousand of this amount in the third quarter of 2007.
Contribution to revenue and earnings since initial inclusion in the consolidated accounts as of January 1, 2007: In the event of an initial inclusion of webMethods in the consolidated accounts as of January 1, 2007, webMethods would have contributed a total of €103–109 million to Software AG’s Group revenue. Of this, approx. €32–38 million would have applied to the third quarter. The Group’s net income rose approx. €2.0 million in the third quarter of 2007 due to the acquisition of webMethods. Group net income for the first nine months would have decreased by approx. €15–16 million in the event of an initial inclusion of webMethods in the consolidated accounts as of January 1, 2007. As existing revenue and cost synergies cannot exactly be allocated, the estimated revenue and income figures mentioned above represent sales and earnings figures of the webMethods subgroup.
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. webMethods’ software identified as an asset during acquisition will be amortized over a period of 7 years. The company’s name was also recognized as an asset. However, the company name is not subject to amortization as its use is not limited in time. Amortization totaled €3,718 thousand in the second and third quarter of 2007, of which €2,668 thousand was recorded in the third quarter.
The deferred tax liabilities resulting from the accounting treatment of the customer base, software, and company name will be reversed in line with the amortization period. Deferred tax liabilities also resulted from the reduction in deferred income. These tax liabilities will be reversed in line with the corresponding reductions in revenue. The three factors together resulted in deferred tax income of €3,795 thousand in the second and third quarter of 2007, of which €2,539 thousand relates to the third quarter.
As part of the planned business restructuring of Software AG in Brazil, this market will be serviced by our own sales company starting on January 1, 2008. Software AG has accordingly not prolonged its exclusive distribution agreement with its previous sales partner beyond December 31, 2007. The sales partner in Brazil has filed a suit against this action in New York, USA, in August of 2007. In the meantime, the initial damage claim has been dropped and the case is now limited to problems of termination. As a result, no provisions needed to be created. A court decision is expected for December 2007.
A small software company in Canada sued Software AG together with webMethods, Inc. and 20 additional defendants including Microsoft and IBM for a patent violation relating to its software in August of 2007. The lawsuit has been filed with a court located in Texas. To date no details concerning the nature of the patent violation have been provided. Software AG sees no indications substantiating the claimed patent violation. Moreover, no quantifiable information regarding alleged damage has been submitted. For these reasons this legal dispute could not be taken into account in the quarterly financial statements according to the rules of IAS 37.
Due to the strong Euro, in particular in relation to the US dollar, negative currency translation effects on Group revenues resulted - compared to the same period in the previous year - in the amount of €16,267 thousand, €5,626 thousand of which was recorded in the third quarter. The currency translation effects on Group EBIT were €7,947 thousand, of which €1,286 thousand is attributable to the third quarter.
Expenses of €10,006 thousand arose from restructuring measures in the first three quarters of 2007; €3,066 thousand of this was incurred in the third quarter.
In the first nine months of 2007, specific bad debt allowances in the amount of €10,148 thousand were created, of which €5,589 thousand was recorded in the third quarter. These bad debt allowances refer to customers in Spain and Latin America. Average specific bad debt allowances in comparable periods of the first nine months from 2003 to 2006 amounted to a total of €2,575 thousand.
As of September 30, 2007, the effective number of employees (i.e., part time employees are taken into account on a pro-rata basis only) amounted to 3,552 (September 30, 2006: 2,666), 78.6 percent of whom were employed abroad (prior year: 70.65 percent). In absolute terms, i.e., with part-time employees taken into account in full, the Group employed 3,662 people (prior year: 2,751) at the end of the third quarter (September 30, 2007).
In addition to the executive area of responsibility for Crossvision, Software AG set up an executive area of responsibility for ETS effective January 8, 2007, for which David Broadbent is responsible. Mr. Broadbent was appointed to the Executive Board effective 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.
The Supervisory Board appointed David Mitchell to the Executive Board effective August 1, 2007. David Mitchell was previously CEO of the U.S. software manufacturer webMethods, Inc., which was taken over by Software AG effective May 25, 2007. He is responsible for sales of the webMethods business line world-wide. This appointment marks the discontinuation of the previous regional sales structure and a continuation of the Company’s focus on the two product divisions of Enterprise Transaction Systems (ETS) and webMethods. The former Executive Board member, Alfred Pfaff, left the Board on August 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. The Annual Shareholders’ Meeting elected Mr. Alf Henryk Wulf as a new member of the Supervisory Board. Mr. Reinhard Springer’s term as employee representative on the Supervisory Board ceased with the end of the Annual Shareholders’ Meeting on May 11, 2007. The employees elected Mr. Rainer Burckhardt as his replacement on April 25, 2007. He assumed his duties on the Supervisory Board as of May 11, 2007.
No significant events have occurred since September 30, 2007, which would warrant inclusion in this report.