America Online 2015 Annual Report Download - page 53

AOL is a leader in the digital content and advertising platform space.
Verizon has been investing in emerging technology that taps into the
market shift to digital content and advertising. AOL’s business model
aligns with this approach, and we believe that its combination of owned
and operated content properties plus a digital advertising platform
enhances our ability to further develop future revenue streams.
The acquisition of AOL has been accounted for as a business combi-
nation. The identification of the assets acquired and liabilities assumed
are finalized and we are in the process of finalizing our valuations for
deferred taxes. These adjustments are not expected to have a material
impact on our consolidated financial statements. The valuations will be
finalized within 12 months following the close of the acquisition.
The fair values of the assets acquired and liabilities assumed were
determined using the income, cost and market approaches. The fair
value measurements were primarily based on significant inputs that are
not observable in the market and thus represent a Level 3 measure-
ment as defined in Accounting Standards Codification (ASC) 820, other
than long-term debt assumed in the acquisition. The income approach
was primarily used to value the intangible assets, consisting primarily
of acquired technology and customer relationships. The income
approach indicates value for an asset based on the present value
of cash flow projected to be generated by the asset. Projected cash
flow is discounted at a required rate of return that reflects the relative
risk of achieving the cash flow and the time value of money. The cost
approach, which estimates value by determining the current cost of
replacing an asset with another of equivalent economic utility, was used,
as appropriate, for plant, property and equipment. The cost to replace a
given asset reflects the estimated reproduction or replacement cost for
the property, less an allowance for loss in value due to depreciation.
The following table summarizes the consideration to AOL’s share-
holders and the identification of the assets acquired, including cash
acquired of $0.5billion, and liabilities assumed as of the close of the
acquisition, as well as the fair value at the acquisition date of AOL’s
noncontrolling interests:
(dollars in millions) As of June23, 2015
Cash payment to AOL’s equity holders $ 3,764
Estimated liabilities to be paid 377
Total consideration $ 4,141
Assets acquired:
Goodwill $ 1,903
Intangible assets subject to amortization 2,504
Other 1,551
Total assets acquired 5,958
Liabilities assumed:
Total liabilities assumed 1,816
Net assets acquired: 4,142
Noncontrolling interest (1)
Total consideration $ 4,141
Goodwill is calculated as the difference between the acquisition date
fair value of the consideration transferred and the fair value of the
net assets acquired. The goodwill recorded as a result of the AOL
transaction represents future economic benefits we expect to achieve
as a result of combining the operations of AOL and Verizon as well as
assets acquired that could not be individually identified and separately
recognized. The preliminary goodwill related to this acquisition is
included within Corporate and other (see Note3 for additional details).
Pro Forma Information
If the acquisition of AOL had been completed as of January1, 2014, our
results of operations, including Operating revenues and Net income
attributable to Verizon, would not have been materially different from
our previously reported results of operations.
Real Estate Transaction
On May19, 2015, Verizon consummated a sale- leaseback transac-
tion with a financial services firm for the buildings and real estate at
our Basking Ridge, New Jersey location. We received total gross
proceeds of $0.7billion resulting in a deferred gain of $0.4billion,
which will be amortized over the initial leaseback term of twenty years.
The leaseback of the buildings and real estate is accounted for as an
operating lease. The proceeds received as a result of this transaction
have been classified within Cash flows used in investing activities
on our consolidated statement of cash flows for the year ended
December31, 2015.
Other
On September3, 2015, AOL announced an agreement to acquire an
advertising technology business for cash consideration that was not
significant. The transaction was completed in October 2015.
On October7, 2014, Redbox Instant by Verizon, a venture between
Verizon and Redbox Automated Retail, LLC (Redbox), a wholly-owned
subsidiary of Outerwall Inc., ceased providing service to its customers.
In accordance with an agreement between the parties, Redbox
withdrew from the venture on October20, 2014 and Verizon wound
down and dissolved the venture during the fourth quarter of 2014. As a
result of the termination of the venture, we recorded a pre-tax loss of
$0.1billion in the fourth quarter of 2014.
During February 2014, Verizon acquired a business dedicated to the
development of Internet Protocol (IP) television for cash consideration
that was not significant.
During the fourth quarter of 2013, Verizon acquired an industry leader
in content delivery networks for $0.4billion. Upon closing, we recorded
$0.3billion of goodwill. Additionally, we acquired a technology
company for cash consideration that was not significant. The consoli-
dated financial statements include the results of the operations of each
of these acquisitions from the date each acquisition closed.
On February 20, 2016, Verizon entered into a purchase agreement
to acquire XO Holdings’ wireline business which owns and operates
one of the largest fiber-based IP and Ethernet networks outside of
Verizon's footprint for approximately $1.8billion, subject to adjust-
ment. The transaction is subject to customary regulatory approvals
and is expected to close in the first half of 2017. Separately, Verizon
entered into an agreement to lease certain wireless spectrum from
XOHoldings and has an option to buy XO Holdings’ entity that owns
itswireless spectrum exercisable under certain circumstances.
51Verizon Communications Inc. and Subsidiaries
Notes to Consolidated Financial Statements continued