CBRE GROUP, INC. | 2013 | FY |

8. Goodwill and Other Intangible Assets

 

The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012 (dollars in thousands):

 

		Americas				EMEA				Asia Pacific				Global Investment Management				Development Services				Total
Balance as of December 31, 2011
Goodwill		$	1,641,748			$	494,116			$	160,197			$	514,189			$	86,663			$	2,896,913
Accumulated impairment losses			(798,290	)			(138,631	)			—				(44,922	)			(86,663	)			(1,068,506	)
			843,458				355,485				160,197				469,267				—				1,828,407
Purchase accounting entries related to acquisitions			15,980				31,440				1,175				(2,277	)			—				46,318
Foreign exchange movement			585				8,140				(636	)			6,788				—				14,877
Balance as of December 31, 2012
Goodwill			1,658,313				533,696				160,736				518,700				86,663				2,958,108
Accumulated impairment losses			(798,290	)			(138,631	)			—				(44,922	)			(86,663	)			(1,068,506	)
			860,023				395,065				160,736				473,778				—				1,889,602
Purchase accounting entries related to acquisitions			60,552				342,035				(3,169	)			—				—				399,418
Foreign exchange movement			(1,228	)			14,407				(19,074	)			7,349				—				1,454
Balance as of December 31, 2013
Goodwill			1,717,637				890,138				138,493				526,049				86,663				3,358,980
Accumulated impairment losses			(798,290	)			(138,631	)			—				(44,922	)			(86,663	)			(1,068,506	)
		$	919,347			$	751,507			$	138,493			$	481,127			$	—			$	2,290,474

 

On December 23, 2013, we acquired 100% of the outstanding stock of London-based Norland, which fortified our real estate outsourcing platform in Europe within our EMEA segment (Norland Acquisition). Norland is a premier provider of building technical engineering services that enables us to self-perform these services in Europe and adds to our expertise in the highly specialized critical environments market. The purchase price for the Norland Acquisition was approximately $475 million, with $433.9 million paid at closing and the remaining contingent consideration payable in 2014. The Norland Acquisition was financed with cash on hand and borrowings under our revolving credit facility. On December 23, 2013, we also issued an aggregate of 362,916 shares of non-vested Class A common stock to certain members of senior management of Norland in connection with this acquisition.

 

The acquisition agreement provides for a contingent payment of up to 50 million British pounds sterling if certain performance criteria are met post-acquisition. In measuring the fair value of the contingent consideration, we assigned probabilities to the performance criteria, based on the nature of the performance criteria and our due diligence performed at the time of the acquisition. The fair value of this contingent consideration was based on the weighted probability of achievement of a certain earnings before interest, taxes, depreciation and amortization (EBITDA) level for the 12-months ending March 31, 2014, which ranged from 22.1 million to 35.0 million British pounds sterling. We valued this contingent payment at 25.5 million British pounds sterling (or $41.8 million) at acquisition date, which has been recorded within accounts payable and accrued expenses in the accompanying consolidated balance sheets.

 

The preliminary purchase accounting adjustments related to the Norland Acquisition have been recorded in the accompanying consolidated financial statements. The excess purchase price over the estimated fair value of net assets acquired has been recorded to goodwill. The goodwill arising from the Norland Acquisition consists largely of the synergies and economies of scale expected from combining the operations acquired from Norland with ours. No goodwill recorded in connection with the Norland Acquisition is deductible for tax purposes. Given the complexity of the transaction, the calculation of the fair value of certain assets and liabilities acquired, primarily intangible assets and income tax items, is still preliminary. The purchase price allocation is expected to be completed as soon as practicable, but no later than one year from the acquisition date. The following table summarizes the aggregate estimated fair values of the assets acquired and the liabilities assumed in the Norland Acquisition (dollars in thousands):

 

Cash and cash equivalents		$	48,132
Receivables, net			138,509
Prepaid expenses			14,072
Deferred tax assets, current			2,912
Other current assets			12,698
Property and equipment			4,164
Other intangible assets			108,974
Other assets			668
Total assets acquired		$	330,129
Accounts payable and accrued expenses		$	142,467
Compensation and employee benefits payable			11,777
Accrued bonus and profit sharing			1,862
Deferred tax liabilities, long-term			21,795
Other liabilities			8,804
Total liabilities assumed		$	186,705
Estimated fair value of net assets acquired		$	143,424

 

The following is a summary of the preliminary estimate of the amortizable intangible assets acquired in connection with the Norland Acquisition (dollars in thousands):

 

										At December 31, 2013
Intangible Asset Class		Weighted Average Amortization Period				Amount Assigned  At Acquisition Date				Accumulated Amortization and Foreign Currency Translation				Net Carrying Amount
Customer relationships			5 years			$	68,807			$	890			$	69,697
Trade name			2 years				35,177				454				35,631
Non-compete agreements			2 years				4,990				65				5,055
Total amortizable intangibles acquired			4 years			$	108,974			$	1,409			$	110,383

 

Norland did not contribute to our statement of operations during the year ended December 31, 2013, with the exception of $9.2 million of direct transaction and integration costs incurred in connection with the Norland Acquisition, which have been included in operating, administrative and other expenses in the accompanying consolidated statements of operations.

 

Unaudited pro forma results, assuming the Norland Acquisition had occurred as of January 1, 2012 for purposes of the 2013 and 2012 pro forma disclosures, are presented below. They include certain adjustments for the years ended December 31, 2013 and 2012, including $33.8 million of increased amortization expense in both years as a result of intangible assets acquired in the Norland Acquisition, $1.1 million and $1.2 million, respectively, of additional interest expense as a result of debt incurred to finance the Norland Acquisition, the removal of $9.2 million of direct costs incurred by us related to the Norland Acquisition for the year ended December 31, 2013, and the tax impact in both years of the pro forma adjustments. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the Norland Acquisition occurred on January 1, 2012 and may not be indicative of future operating results (dollars in thousands, except share data):

 

		Year Ended December 31,
		2013				2012
		(Unaudited)
Revenue		$	7,792,992			$	7,012.318
Operating income		$	614,163			$	567,201
Net income attributable to CBRE Group, Inc.		$	313,567			$	296,345
Basic income per share		$	0.96			$	0.92
Weighted average shares outstanding for basic income per share			328,110,004				322,315,576
Diluted income per share		$	0.95			$	0.91
Weighted average shares outstanding for diluted income per share			331,762,854				327,044,145

 

During 2013, we completed ten in-fill acquisitions, most notably a leading firm serving the London prime residential real estate market, a leading regional commercial real estate services firm based in San Francisco, a retail real estate services firm in the U.S. Mid-Atlantic region, a facility consulting and project advisory firm serving the healthcare industry and based in Richmond, Virginia, and two property management specialist firms – one in the Czech Republic and Slovakia and one in Belgium. During 2012, we completed five in-fill acquisitions, including our former affiliate companies in Turkey and Vietnam, a niche real estate investment advisor and an independent commercial and residential property partnership in the U.K., and a brokerage and property management firm in Atlanta.

 

Our annual assessment of goodwill and other intangible assets deemed to have indefinite lives has historically been completed as of the beginning of the fourth quarter of each year. We performed the 2013, 2012 and 2011 assessments as of October 1. When we performed our required annual goodwill impairment review as of October 1, 2013, 2012 and 2011, we determined that no impairment existed as the estimated fair value of our reporting units was in excess of their carrying value.

 

Other intangible assets totaled $841.2 million and $786.8 million, net of accumulated amortization of $348.6 million and $273.6 million, as of December 31, 2013 and 2012, respectively, and are comprised of the following (dollars in thousands):

 

		December 31,
		2013								2012
		Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
Unamortizable intangible assets
Management contracts		$	127,050							$	219,132
Trademarks			56,800								56,800
Trade names			20,400								20,400
		$	204,250							$	296,332
Amortizable intangible assets
Customer relationships		$	362,810			$	(102,429	)		$	259,256			$	(84,628	)
Mortgage servicing rights			259,931				(79,448	)			195,813				(50,858	)
Management contracts			180,981				(49,785	)			178,561				(32,005	)
Backlog and incentive fees			61,507				(61,507	)			58,478				(57,739	)
Trade name			35,631				—				—				—
Other			84,684				(55,397	)			71,984				(48,401	)
		$	985,544			$	(348,566	)		$	764,092			$	(273,631	)
Total intangible assets		$	1,189,794			$	(348,566	)		$	1,060,424			$	(273,631	)

 

Management contracts with indefinite useful lives primarily represent intangible assets identified as a result of the REIM Acquisitions relating to relationships with open-end funds. During the year ended December 31, 2013, we recorded a non-amortizable intangible asset impairment of $98.1 million, which related to a decrease in value of our open-end funds, primarily in Europe (see Note 5). Trademarks of $56.8 million were separately identified as a result of the 2001 Acquisition. In connection with the REIM Acquisitions, a trade name of $20.4 million was separately identified, which represented the Clarion Partners trade name in the U.S. These intangible assets have indefinite useful lives and accordingly are not being amortized. As a result of the Insignia Acquisition, a $19.8 million trade name was separately identified, which represented the Richard Ellis trade name in the U.K. During the year ended December 31, 2012, this trade name was written off as a result of the discontinuation of its use (see Note 5).

 

Customer relationships primarily represent intangible assets identified in the Trammell Crow Company Acquisition and the Norland Acquisition relating to existing relationships primarily in the brokerage, property management, project management and facilities management lines of business. These intangible assets are being amortized over useful lives of up to 20 years.

 

Mortgage servicing rights represent the carrying value of servicing assets in our mortgage brokerage line of business in the U.S. The mortgage servicing rights are being amortized over the estimated period that net servicing income is expected to be received, which is typically up to ten years.

 

Management contracts consist primarily of asset management contracts relating to relationships with closed-end funds and separate accounts in the U.S., Europe and Asia that were separately identified as a result of the REIM Acquisitions. These management contracts are being amortized over useful lives of up to 13 years.

 

Backlog and incentive fees mostly represented the fair value of net revenue backlog and incentive fees acquired as part of the Trammell Crow Company Acquisition as well as other in-fill acquisitions. These intangible assets were amortized over useful lives of up to one year.

 

The trade name was separately identified as a result of the Norland Acquisition and will be amortized over two years.

 

Other amortizable intangible assets mainly represent transition costs, non-compete agreements acquired as a result of the REIM Acquisitions and other intangible assets acquired as a result of the Trammell Crow Company Acquisition and the Insignia Acquisition. Other intangible assets are being amortized over useful lives of up to 20 years.

 

Amortization expense related to intangible assets was $85.4 million, $78.6 million and $41.9 million for the years ended December 31, 2013, 2012 and 2011, respectively. The estimated annual amortization expense for each of the years ending December 31, 2014 through December 31, 2018 approximates $115.5 million, $107.7 million, $77.2 million, $70.0 million and $66.0 million, respectively.