Windstream 2013 Annual Report Download - page 189

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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F-53
3. Acquisitions, Continued:
Supplemental Pro Forma Information (Unaudited) – PAETEC Acquisition - The amounts of PAETEC's revenue and net loss
included in our consolidated statements of income for the year ended December 31, 2011, and the proforma revenue and net
income from continuing operations of the combined entity for the year ended December 31, 2011 had the acquisition occurred
January 1, 2010, were as follows:
(Millions) Revenue
Net (Loss) Income
from Continuing
Operations
Actual from November 30, 2011 through December 31, 2011 $ 181.2 $ (4.2)
Supplemental pro forma for the year ended December 31, 2011 $ 6,170.1 $ 115.0
The pro forma information presents our historical results adjusted to include PAETEC, with the results prior to the merger
closing date adjusted to include the pro forma effect of the elimination of transactions between us and PAETEC, the adjustment
to revenue to align revenue policies, the adjustment to amortization expense associated with the estimated acquired fair value of
intangible assets, the impact of merger and integration expenses related to the acquisition and the impact of tax benefits from
PAETEC's loss from operations.
The pro forma results are presented for illustrative purposes only and do not reflect either the realization of potential cost
savings or any related integration costs. These pro forma results do not purport to be indicative of the results that would have
actually been obtained if the merger had occurred as of the date indicated, nor do the pro forma results intend to be a projection
of results that may be obtained in the future.
We conducted appraisals necessary to assess the fair values of the assets acquired and liabilities assumed and the amount of
goodwill recognized as of the acquisition date for PAETEC. The accompanying consolidated financial statements reflect our
combined operations with PAETEC for the periods following the acquisition date. Employee severance and transaction costs
incurred in conjunction with the acquisition were expensed to merger and integration expense in the accompanying
consolidated statements of income (see Note 10).
The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of
the acquisition date, with amounts exceeding fair value recognized as goodwill. Goodwill associated with this acquisition was
attributable to the PAETEC workforce and expected synergies. Approximately $38.7 million of goodwill associated with the
acquisition of PAETEC is expected to be deductible for tax purposes.
The fair values of the assets acquired and liabilities assumed were determined using income, cost, and market approaches.
Identified intangible assets, consisting primarily of customer lists, were valued primarily on the basis of the present value of
future cash flows, which is an income approach. Significant assumptions utilized in the income approach were based on our
specific information and projections, which are not observable in the market and are thus considered Level 3 measurements as
defined by authoritative guidance. 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 property, plant and equipment. The cost to replace
a given asset reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to
depreciation. The fair value of the long-term debt and related interest rate swap agreements assumed were determined based on
quoted prices for the repayment of these instruments.
The PAETEC credit facility was valued based on the expected redemption cost, while the remaining bonds were valued based
on market value. Equity consideration was based on the closing price of our common stock on November 30, 2011.
Consideration related to assumed restricted stock units was calculated based on the closing price of our common stock on
November 30, 2011, net of the portion of the fair value attributable to future vesting requirements. Consideration related to
assumed stock options was calculated based on the fair value of the new Windstream stock options issued as of November 30,
2011, net of the portion of the fair value attributable to future vesting requirements. The fair value of these stock option awards
was calculated using the Hull-White II Lattice model based on assumptions determined as of November 30, 2011. The amount
allocated to unearned compensation cost for awards subject to future service requirements was calculated based on the fair
value of such awards at the acquisition date and will be recognized as compensation cost over the remaining future service
period.