Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007 (In thousands of dollars, except per share amounts)
2. Business acquisitions:
a) On May 1, 2008, the Company acquired 100% of the outstanding common shares of MX. The principal business activity of MX is to provide markets for the buying and selling of derivatives products. Its subsidiary, CDCC, is the issuer, clearing house and guarantor for options and futures contracts traded at MX as well as certain other over-the-counter (“OTC”) products. In addition to CDCC, as at May 1, 2008, MX also held a 51% interest in Montréal Climate Exchange Inc. (“MCeX”), which was created in partnership with the Chicago Climate Exchange. Inc., a 50% interest in Canadian Resources Exchange Inc. (“CAREX”) (note 2c), a joint venture created with NYMEX Holdings Inc. (now CMEG NYMEX Holdings Inc. or “CME”) and a 31.4% interest in BOX (note 2b), a U.S. automated equity options market for which MX is the technical operator. The aggregate estimated purchase price consisted of:
| Common shares of TMX Group (15,316,608 | $ | 806,573 | ||
| shares issued) | ||||
| Cash | 428,200 | |||
| Estimated direct transaction costs | 8,208 | |||
| Estimated restructuring costs | 11,429 | |||
| Fair value of MX share options exchanged | 1,417 | |||
| Aggregate estimated purchase price: | $ | 1,255,827 | ||
The acquisition was accounted for under the purchase method and the results of operations have been included in the consolidated statement of income from the date of acquisition. The purchase price and the purchase price allocation are estimated at this time and will be finalized in the upcoming months as the estimates for direct transaction costs and restructuring costs become final. The estimated restructuring costs primarily relate to employee termination costs, and the costs associated with the consolidation of the Company’s technology data centres and offices. The TMX Group shares issued as part of the transaction were valued at $52.66 per share. The $52.66 per share represents the volume weighted average market price of TMX Group common shares over a reasonable period before and after December 10, 2007, the day the acquisition of MX was announced. The estimated purchase price has been allocated to the fair values of the assets acquired and liabilities assumed as follows:
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| Net assets acquired | ||||
| Cash and cash equivalents | $ | 81,307 | ||
| Marketable securities | 49,192 | |||
| Restricted cash | 1,407 | |||
| Daily settlements and cash deposits | 193,117 | |||
| Other current assets | 11,357 | |||
| Premises and equipment | ||||
| Investment in affiliate (includes $12,972 of | 7,186 | |||
| intangible assets) | 75,895 | |||
| Other assets | 190 | |||
| Future income tax asset | 3,802 | |||
| Intangible assets | 796,977 | |||
| Goodwill | 460,080 | |||
| Net tangible and intangible assets acquired | 1,680,510 | |||
| Less liabilities assumed: | ||||
| Current liabilities | 19,118 | |||
| Daily settlements and cash deposits | 193,117 | |||
| Future income tax liability | 212,448 | |||
| Total net assets acquired | 1,255,827 | |||
| The Company recognized $1,270,029 of goodwill and intangible assets as part of the acquisition. The details of these assets are as follows: | ||||
| Amortization | ||||
| Description | Period | Amount | ||
| Goodwill | n/a | $460,080 | ||
| Indefinite life intangible assets: | ||||
| Derivates products | Not amortized | 630,926 | ||
| Trade names | Not amortized | 28,214 | ||
| Regulatory designation | Not amortized | 2,000 | ||
| Definite life intangible assets: | ||||
| MX trading participants | 30 years | 126,466 | ||
| BOX trading participants (included in investment in | ||||
| in affiliate) | 30 years | 12,972 | ||
| Capitalized software | 5 years | 7,942 | ||
| Open interest | 6 months | 1,429 | ||
| Total goodwill and intangible assets | $ | 1,270,029 | ||
In 2008, the Company recognized intangible amortization expense of $5,382 (2007 – $Nil) related to the acquisition of MX.
The goodwill acquired is not deductible for tax purposes.
Other acquisition related expenses represent non-recurring costs associated with the acquisition of MX. During 2008, the Company recognized $15,902 in non-recurring costs, which includes a loss on termination of joint venture of $15,152.
In connection with the acquisition of MX, the Company provided ISE Ventures, LLC (“Ventures”) with a notice of a competing transaction as required under the terms of the CDEX shareholders’ agreement, which was created to operate DEX, a new derivatives exchange. As the parties were unable to agree to an alternative business arrangement, the Company acquired 100% ownership of CDEX and paid Ventures $15,152 on April 1, 2008.
