Question
November 8, 2004
BY FACSIMILE
Michael B. Verne
Federal Trade Commission
Premerger Notification Office
Room 303
Washington, DC 20580
Re: Confirmation of Advice RegardingForeign Registered
Intellectual Property and Allocation of Purchase Price
Dear Mike:
This letter willconfirm our discussion on November 3, 2004, as well as your conversation with(redacted) on November 2, 2004 regarding theallocation of the purchase price for the acquisition of certain intellectualproperty and goodwill.
As we discussed,COMPANY A will acquire certain intellectual property and goodwill from COMPANYB for approximately $92 million (the "Transaction"). COMPANY A presentlydoes not hold any other assets of COMPANY B and will not hold any such assetsuntil the Transaction closes. The intellectual property that will be acquiredincludes various types of technology such as trade secrets, know-how, andpatents that are used to manufacture and sell products in the United States aswell as abroad. Certain patents are registered with the U.S. Patent andTrademark Office, and corresponding patents are registered outside of the United States. You confirmed that the foreign patentsand other technology are deemed foreign assets for purposes of HSR analysis even though the underlying technology is directly orindirectly owned by Company B and is the same or similar to the technology usedin the U.S.
Under Section802.50, the acquisition of assets located outside the United States is exempt from the requirements of the HSR Act unless the foreign assets the acquiring person would hold asa result of the acquisition generated sales in or into the U.S. exceeding $50 million during the acquired person's mostrecent fiscal year. In this case, less than $50 million in sales into the U.S. was generated from products that were manufactured outsidethe United States pursuant to the foreign technology. Youconfirmed that the exemption in 802.50 applies to the foreign technology and wemay properly exclude the value of those assets from the total value of thetransaction for purposes of HSR coverage analysis.
In connectionwith the HSR analysis, the acquiring person has donea fair market valuation and allocation of the purchase price of theintellectual property and goodwill that it will acquire in connection with theTransaction. Under this analysis, the value of the U.S. intellectual propertyand goodwill falls well below the $50 million HSRthreshold because only about 44% of the products are manufactured in the U.S.and only about 32% of the products are sold in the U.S. For purposes of taxallocation, the parties may allocate to a U.S. entity aportion of the purchase price that is attributable to the foreign technologydescribed above. Under the tax allocation, the value of the transactionassigned to the U.S. may exceed $50 million. However, the taxallocation is to be based upon which of Company B's entities receives theproceeds of the sale, rather than where the products are manufactured or sold.You have advised us that the tax allocation is not determinative for the HSR coverage analysis and that the appropriate valuation to considerhere is the value of the U.S. assets only, excluding the foreignassets that are exempt under 802.50.
We trulyappreciate your advice on the above-described fact pattern. Please contact mepromptly at (redacted) in the event that your understanding of our telephonediscussion varies in any way from mine.