PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT ATTORNEY-CLIENT COMMUNICATION
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, NY 10022
INTERNAL TAX MEMORANDUM
Purchase Price Allocation Methodology
Acquisition of Cloudium Technologies plc by Solara Digital Infrastructure Fund VI LP
Date: June 15, 2024 Matter No.: 1041-00003
TO:
Harrison Wexford, Responsible Partner, Mergers & Acquisitions, Calderwood & Harkness LLP
Tiffany Rosenthal, Lead Associate, Mergers & Acquisitions, Calderwood & Harkness LLP
Priya Narasimhan, Co-Managing Partner & Chief Investment Officer, Solara Digital Infrastructure LP
FROM:
Leonard Cross, Specialist Partner, Tax, Calderwood & Harkness LLP
RE:
Purchase Price Allocation Methodology — Acquisition of Cloudium Technologies plc by Solara Digital Infrastructure Fund VI LP
CC:
Richard Okamura, Lead Partner, Transaction Tax, Glenmore Thornton LLP
Vanessa Liu, Lead Partner, Financial Due Diligence, Glenmore Thornton LLP
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I. EXECUTIVE SUMMARY
This memorandum has been prepared by Calderwood & Harkness LLP in its capacity as transaction counsel to Solara Digital Infrastructure Fund VI LP ("Fund VI" or the "Buyer") to analyze the framework for allocating the $6,800,000,000 aggregate purchase price among asset classes in connection with Fund VI's acquisition of Cloudium Technologies plc ("Cloudium" or the "Target") via reverse triangular merger under the Delaware General Corporation Law (the "DGCL"). The merger will be effected by the merger of Stratos Merger Sub Inc. ("Merger Sub"), a Delaware corporation and wholly owned subsidiary of Fund VI, with and into Cloudium, with Cloudium surviving as a wholly owned subsidiary of Fund VI. Closing of the merger is expected to occur at 11:59 PM ET on July 9, 2024.
The allocation of the aggregate purchase price among the assets acquired in the transaction is governed primarily by Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), and the residual method prescribed in Treasury Regulations §§ 1.1060-1 and 1.338-6. This memorandum sets forth: (i) the applicable legal framework governing the purchase price allocation; (ii) the determination of total consideration for allocation purposes (the "Adjusted Purchase Price" or "Total Allocable Amount"); (iii) the proposed allocation of the Adjusted Purchase Price among the seven Internal Revenue Service ("IRS") asset classes (Classes I through VII); (iv) valuation methodology considerations; (v) cross-border allocation considerations arising from Cloudium's operations conducted through subsidiaries in the United Kingdom, India, and Germany; (vi) coordination with Glenmore Thornton LLP's financial due diligence and independent valuation work; and (vii) recommended next steps for finalizing the allocation and completing the required tax filings.
Both the Buyer and the Seller are required to report the purchase price allocation on IRS Form 8594 (Asset Acquisition Statement Under Section 1060), which must be attached to their respective federal income tax returns for the taxable year that includes the closing date. Specifically, Fund VI will attach Form 8594 to its Form 1065 (U.S. Return of Partnership Income) for the taxable year ending December 31, 2024, and the former Cloudium shareholders (through the Stockholder Representative, Douglas Pemberton) will report the allocation on their respective returns.
Key Conclusion: Based on our preliminary analysis, and subject to completion of the independent fair market value appraisals being conducted by Glenmore Thornton LLP, the overwhelming majority of the purchase price is expected to be allocated to Class V intangible assets (including developed technology, customer relationships, and trade names and trademarks) and Class VII assets (goodwill and going-concern value). This allocation pattern is consistent with the fundamental economics of Cloudium's SaaS-driven business model, which derives substantially all of its value from significant intangible intellectual property, a large and highly retentive installed base of mid-market and enterprise customers, and the strength and recognition of the Cloudium brand. The allocation to these asset classes will generate substantial annual tax amortization deductions under Section 197 of the Code for Fund VI and its limited partners, enhancing the after-tax return on the investment.
II. BACKGROUND — TRANSACTION OVERVIEW
A. Structure of the Acquisition
The acquisition of Cloudium will be effected through a reverse triangular merger pursuant to the Agreement and Plan of Merger dated January 22, 2024 (the "Merger Agreement"), by and among Fund VI, Merger Sub, and Cloudium. Stratos Merger Sub Inc. is a Delaware corporation formed for the sole purpose of consummating the merger and is a direct wholly owned subsidiary of Fund VI. Cloudium Technologies plc is a public limited company incorporated under the laws of England and Wales (Company No. 09734521), with its shares of common stock listed on the Nasdaq Global Select Market under the ticker symbol "CLDM" and its U.S. headquarters located at 600 Townsend Street, Suite 800, San Francisco, California 94103.
Pursuant to the terms of the Merger Agreement, at the effective time of the merger, Merger Sub will merge with and into Cloudium, with Cloudium surviving the merger as a wholly owned subsidiary of Fund VI (the "Surviving Corporation"). At the effective time, each share of Cloudium common stock outstanding immediately prior to the effective time (other than shares subject to rollover elections, dissenting shares, and shares held by Cloudium as treasury stock or by Fund VI or Merger Sub) will be converted into the right to receive $36.92 per share in cash (the "Per Share Merger Consideration"), without interest and subject to applicable withholding taxes.
As of the date of this memorandum, there are 184,200,000 shares of Cloudium common stock outstanding. The implied total equity value of the transaction based on the Per Share Merger Consideration is $6,800,000,000 (184,200,000 shares × $36.92 per share), representing the headline deal value. At the agreed-upon Per Share Merger Consideration, the transaction implies an enterprise value to last-twelve-month EBITDA multiple of approximately 16.8x, based on Cloudium's LTM EBITDA of $405,000,000 for the fiscal year ended September 30, 2023. Cloudium's annual recurring revenue ("ARR") as of December 31, 2023 was $1,740,000,000.
The Merger Agreement provides for rollover elections by two significant Cloudium equity holders:
(a) Jonathan Hargrove, Chief Executive Officer of Cloudium, who holds 7,736,400 shares (approximately 4.2% of Cloudium's outstanding shares), has elected to roll over 50% of his shares (3,868,200 shares), representing approximately $142,814,544 in value at the Per Share Merger Consideration; and
(b) Pinnacle Growth Ventures LLC, a significant institutional shareholder holding 21,367,200 shares (approximately 11.6% of Cloudium's outstanding shares), has elected to roll over 60% of its shares (12,820,320 shares), representing approximately $473,241,408 in value at the Per Share Merger Consideration.
The total rollover equity is approximately $616,055,952. The rollover participants will receive equity interests in the Surviving Corporation (or a parent entity thereof) in exchange for their Cloudium shares, rather than cash. The remaining cash merger consideration payable to non-rolling shareholders is approximately $6,183,944,048.
B. Target's Corporate and Subsidiary Structure
Cloudium Technologies plc operates a global cloud-native SaaS platform providing enterprise resource planning ("ERP"), customer relationship management ("CRM"), and business intelligence solutions to mid-market and enterprise customers. The company conducts its business through a parent entity and three operating subsidiaries located in the United Kingdom, India, and Germany, as described below:
(a) Cloudium Technologies plc (Parent) — Incorporated under the laws of England and Wales (Company No. 09734521). While domiciled in England and Wales, Cloudium maintains its principal executive offices and U.S. headquarters at 600 Townsend Street, Suite 800, San Francisco, California 94103. The parent entity houses the core intellectual property portfolio, executive management, and U.S. commercial operations.
(b) Cloudium Technologies UK Ltd. — Incorporated under the laws of England and Wales (Company No. 11287456). This subsidiary employs approximately 1,200 individuals and serves as the company's primary European commercial and product development hub. For the fiscal year ended September 30, 2023, Cloudium UK reported revenue of £312,000,000 (approximately $390,000,000 at an exchange rate of $1.25/£1.00).
(c) Cloudium Technologies India Pvt. Ltd. — Organized under the laws of India, with its principal office in Bangalore, Karnataka, India. This subsidiary employs approximately 2,400 individuals and serves as the company's primary research and development ("R&D") center and customer support hub. The Indian subsidiary performs contract R&D services for the parent entity and its affiliates under cost-sharing and intercompany service agreements.
(d) Cloudium Solutions GmbH — Organized under the laws of Germany, with its principal office in Berlin, Germany. This subsidiary employs approximately 400 individuals and is responsible for sales, customer success, and related commercial activities in the DACH region (Germany, Austria, and Switzerland).
As of the date of this memorandum, Cloudium employs approximately 6,800 individuals globally across these four entities.
C. Key Identifiers
For reference purposes, the key tax and entity identification information for the principal parties is as follows:
D. Sources and Uses
The following table summarizes the preliminary sources and uses of funds for the transaction, which are relevant to the determination of the Total Allocable Amount discussed in Section IV of this memorandum:
Sources of Funds:
Uses of Funds:
The existing indebtedness to Atlas Commercial Lending Corp. consists of a $620,000,000 term loan and a $200,000,000 revolving credit facility, each outstanding under a credit agreement dated March 15, 2021. Both facilities will be repaid in full and terminated at the closing of the merger.
III. APPLICABLE LEGAL FRAMEWORK
A. Section 1060 of the Internal Revenue Code — Overview
Section 1060 of the Code governs the allocation of consideration in any "applicable asset acquisition." An applicable asset acquisition is defined under Section 1060(c) as any transfer of assets that constitutes a trade or business (as defined in Treasury Regulations § 1.1060-1(b)(2)) and with respect to which the transferee's basis in the acquired assets is determined wholly by reference to the consideration paid for such assets. The purpose of Section 1060 is to ensure that the allocation of purchase price among the assets of an acquired trade or business is conducted in a consistent manner by both the buyer and the seller, using the residual method prescribed in Treasury Regulations § 1.338-7 (as cross-referenced by Treasury Regulations § 1.1060-1(a)).
In the context of the present transaction, the acquisition of Cloudium is structured as a reverse triangular merger in which Merger Sub merges with and into Cloudium, and Cloudium survives as a wholly owned subsidiary of Fund VI. For federal income tax purposes, and as set forth in the separate tax memorandum dated November 1, 2023 regarding the Section 368(a)(2)(E) qualification analysis, the merger is expected to be treated as an acquisition of the Target's assets to the extent that the non-rollover portion of the consideration is treated as a taxable exchange. Specifically, to the extent that the merger is treated as a purchase of assets (or deemed purchase of assets) for tax purposes, Section 1060 requires the residual method for allocating the total consideration among the acquired assets.
Section 1060 mandates that both the buyer and the seller apply the same allocation methodology in determining gain or loss with respect to the transaction. Although the buyer and seller may ultimately disagree on the specific fair market values assigned to particular assets, each party is required to use the residual method and to report the allocation on IRS Form 8594 (Asset Acquisition Statement Under Section 1060). Where the buyer and seller have agreed upon an allocation (whether in the acquisition agreement itself or in a subsequent agreement), such allocation is generally binding on both parties for federal income tax purposes, provided that the allocation was arrived at through arm's-length negotiation. See Treasury Regulations § 1.1060-1(c)(4).
B. The Residual Method — Treasury Regulations §§ 1.1060-1 and 1.338-6
The residual method, as prescribed in Treasury Regulations § 1.1060-1 (which incorporates by reference the rules of Treasury Regulations § 1.338-6), requires that the aggregate consideration paid in an applicable asset acquisition be allocated among the acquired assets in a specific priority order across seven designated asset classes (Class I through Class VII). The methodology operates as follows:
(a) Consideration is first allocated to Class I assets (cash and cash equivalents, demand deposits, and similar items) up to their aggregate fair market value.
(b) Any remaining consideration is then allocated to Class II assets (actively traded personal property, including publicly traded securities, certificates of deposit, and foreign currency) up to their aggregate fair market value.
(c) The process continues sequentially through Class III (accounts receivable, mortgages, credit card receivables, and debt instruments not included in Classes I or II), Class IV (inventory or stock in trade), Class V (all assets not included in any other class, including tangible personal property, real property, and intangible assets other than goodwill and going-concern value), and Class VI (Section 197 intangibles other than goodwill and going-concern value), in each case up to the aggregate fair market value of the assets in that class.
(d) Any consideration remaining after allocation to Classes I through VI is assigned to Class VII (goodwill and going-concern value). Class VII operates as the "residual" class, absorbing the excess of total consideration over the aggregate fair market value of all identified assets in Classes I through VI.
The fair market value of the assets in each class must be determined using generally accepted valuation methodologies appropriate to the type of asset in question. The following provides a detailed description of each class and the types of assets that fall within its scope:
Class I — Cash and Cash Equivalents. This class includes cash, demand deposits (whether in domestic or foreign currency), and similar items such as savings accounts and short-term certificates of deposit. Class I assets are allocated at face value.
Class II — Actively Traded Personal Property. This class includes personal property that is actively traded on an established financial market, including publicly traded securities, certificates of deposit (other than those included in Class I), and foreign currency (other than amounts included in Class I). Class II assets are allocated at their fair market value as determined by reference to market prices.
Class III — Accounts Receivable and Debt Instruments. This class includes accounts receivable, mortgages, credit card receivables, and debt instruments (including contingent debt instruments and those arising in the ordinary course of business) that are not included in Class I or Class II. These assets are commonly referred to as "mark-to-market" assets and are allocated at their fair market value, which may differ from their face or book value due to collectibility risk, discount rates, or other factors.
Class IV — Inventory. This class includes stock in trade or other property of a kind that would properly be included in the inventory of the transferor if on hand at the close of the taxable year, or property held by the transferor primarily for sale to customers in the ordinary course of business. In the case of a cloud-native SaaS company such as Cloudium, Class IV inventory is expected to be nil or nominal.
Class V — All Other Assets. This is a broad residual class that captures all assets not included in Classes I through IV, Class VI, or Class VII. Importantly, Class V includes both tangible assets (furniture, fixtures, equipment, land, buildings, leasehold improvements) and intangible assets that are not goodwill or going-concern value, to the extent they are not Section 197 intangibles covered by Class VI. Examples of Class V intangibles include patents, copyrights, proprietary software, customer lists and customer relationships, covenants not to compete, licenses, permits, franchises, trade names, and trademarks. In practice, for many acquisitions of technology and SaaS businesses, Class V is a critical allocation class because it encompasses the identified intangible assets of the business.
Class VI — Section 197 Intangibles (Other Than Goodwill and Going-Concern Value). This class includes Section 197 intangibles (as defined in Section 197(d) of the Code) other than goodwill and going-concern value. The distinction between Class V and Class VI can be complex and has been the subject of administrative guidance; in general, intangible assets that are Section 197 intangibles (other than goodwill and going-concern value) and that are not also described in one of the other classes are allocated to Class VI. However, as discussed below, many identified intangible assets (such as customer-based intangibles, patents, and trademarks) may fall within either Class V or Class VI, and the practical significance of the distinction is limited because both classes are allocated before Class VII.
Class VII — Goodwill and Going-Concern Value. This class is the residual class and includes goodwill and going-concern value. All remaining consideration, after allocation to Classes I through VI, is assigned to Class VII. Goodwill, as used in this context, includes the value of a trade or business attributable to the expectancy of continued customer patronage, whether due to the name or reputation of the business or any other factor. Going-concern value is the additional element of value in a trade or business that attaches to property by reason of its existence as an integral part of a going concern.
C. Interaction with Section 197 Amortization
Section 197 of the Code provides that the buyer of a trade or business may amortize certain acquired intangible assets (referred to as "Section 197 intangibles") ratably over a 15-year period on a straight-line basis, beginning with the month in which the intangible is acquired. The amortization deduction under Section 197 is the exclusive cost-recovery method for Section 197 intangibles; no other depreciation or amortization method may be used.
Section 197 intangibles, as defined in Section 197(d), include the following categories of assets, among others:
(i) Goodwill;
(ii) Going-concern value;
(iii) Workforce in place (including its composition and terms and conditions, contractual or otherwise, of its employment);
(iv) Business books and records, operating systems, and any other information base (including lists or other information with respect to current or prospective customers);
(v) Any patent, copyright, formula, process, design, pattern, know-how, format, or similar item;
(vi) Any customer-based intangible (including customer lists, customer relationships, and customer contracts);
(vii) Any supplier-based intangible;
(viii) Any license, permit, or other right granted by a governmental unit or an agency or instrumentality thereof;
(ix) Any covenant not to compete (or other arrangement to the extent it has substantially the same effect as a covenant not to compete) entered into in connection with the acquisition of a trade or business; and
(x) Any franchise, trademark, or trade name.
The significance of Section 197 to the purchase price allocation in the Cloudium acquisition cannot be overstated. Because substantially all of the purchase price is expected to be allocated to intangible assets and goodwill — each of which qualifies as a Section 197 intangible — the allocation will determine the magnitude of the annual amortization deductions available to Fund VI and, through Fund VI's partnership tax return, to Fund VI's limited partners. Higher allocations to Section 197 intangibles (within the bounds of supportable fair market value determinations) will generate larger amortization deductions, thereby creating a significant tax shield and enhancing the after-tax internal rate of return on the investment for Fund VI's investors.
For illustrative purposes, if the aggregate allocation to Section 197 intangibles (including goodwill) totals approximately $6.0 billion, the annual straight-line amortization deduction would be approximately $400,000,000 per year for 15 years. At an assumed combined federal and state effective tax rate of approximately 25%, this amortization would generate annual tax savings of approximately $100,000,000, with a present value (at a 10% discount rate) of approximately $760,000,000 over the 15-year amortization period. These figures are illustrative only and will be refined upon completion of the allocation.
It is therefore in Fund VI's economic interest to maximize the aggregate allocation to amortizable intangible assets within the constraints of supportable fair market value determinations. However, it is essential that any allocation be defensible and based on sound valuation methodologies, as the IRS has the authority to challenge an allocation that it believes does not reflect fair market value. An aggressive allocation that is not supported by credible valuation evidence could be adjusted by the IRS on audit, potentially resulting in the disallowance of amortization deductions and the imposition of accuracy-related penalties under Section 6662 of the Code.
D. Section 1060 Reporting Obligations
As noted above, both the buyer and the seller in an applicable asset acquisition are required to file IRS Form 8594 (Asset Acquisition Statement Under Section 1060) with their respective federal income tax returns for the taxable year that includes the date of the acquisition. Form 8594 requires each party to report the total sales price (aggregate consideration) and the allocation of that consideration among the seven asset classes.
In the present case:
(a) Buyer — Fund VI. Fund VI is a Delaware limited partnership and will file its partnership tax return on IRS Form 1065 for the taxable year ending December 31, 2024. The Form 8594 will be attached to Fund VI's Form 1065. With extensions, the filing deadline for Fund VI's 2024 Form 1065 is September 15, 2025.
(b) Seller — Former Cloudium Shareholders / Stockholder Representative. The former shareholders of Cloudium who received cash merger consideration will report their individual gain or loss on their respective tax returns. For purposes of coordination and Form 8594 reporting, the Stockholder Representative (Douglas Pemberton) will be responsible for engaging with Fund VI on the allocation. The Stockholder Representative's counsel is Ridgeway Phelps & Sato LLP (lead partner, Catherine Answorth).
If the purchase price allocation is subsequently adjusted — for example, as a result of the working-capital true-up under Section 2.7 of the Merger Agreement or the resolution of indemnification claims from the escrow — a supplemental Form 8594 must be filed by both parties for the taxable year in which the adjustment occurs.
IV. DETERMINATION OF ADJUSTED PURCHASE PRICE FOR ALLOCATION PURPOSES
A. Components of the Aggregate Deemed Sale Price
The starting point for the purchase price allocation under Section 1060 is the determination of the total amount to be allocated among the acquired assets — referred to herein as the "Total Allocable Amount" or "Adjusted Purchase Price." The Total Allocable Amount is not simply the headline equity consideration of $6,800,000,000 but must be adjusted to include assumed liabilities and certain capitalized buyer costs, and to account for the treatment of rollover equity, escrow, and other components of the transaction structure.
The principal components of the Total Allocable Amount are as follows:
(i) Total Equity Consideration. The starting point is the total equity consideration of $6,800,000,000, calculated as 184,200,000 shares of Cloudium common stock multiplied by the Per Share Merger Consideration of $36.92.
(ii) Assumed Liabilities. Under general tax principles, liabilities of the target that are assumed by the buyer (or that remain liabilities of the surviving entity as a going concern) are treated as additional consideration paid by the buyer for the acquired assets. In the present transaction, the Surviving Corporation will retain all of Cloudium's post-closing operating liabilities, including accounts payable, accrued expenses, deferred revenue (reflecting SaaS subscription prepayments), accrued compensation and benefits, income tax payable, and other ordinary-course liabilities. These assumed liabilities must be added to the equity consideration to arrive at the Total Allocable Amount. The precise amount of assumed liabilities will be determined based on the closing balance sheet, which is expected to be delivered on or about July 8, 2024, one day prior to the anticipated closing date. Glenmore Thornton LLP will review and verify the closing balance sheet as part of its engagement.
In addition, the $3,740,000,000 Term Loan B facility, which will be funded at closing by Meridian Atlantic Bank, N.A. and Ironclad Capital Markets LLC, will be incurred by the Surviving Corporation (or a borrower entity in the acquisition structure) and will constitute a post-closing liability. However, for purposes of the purchase price allocation, this new debt is properly treated as a source of funds used to pay the purchase price, rather than an assumed liability of the target. The treatment of the Term Loan B as a source of purchase price funds (rather than an assumed target liability) does not change the overall purchase price computation.
By contrast, the $820,000,000 of existing indebtedness to Atlas Commercial Lending Corp. (consisting of the $620,000,000 term loan and $200,000,000 revolving credit facility under the credit agreement dated March 15, 2021) will be repaid in full at closing. Because this indebtedness is extinguished at closing and not assumed by the Surviving Corporation, it is not treated as an assumed liability for purchase price allocation purposes. Instead, the repayment of this indebtedness is effectively part of the overall acquisition cost structure — the proceeds used to repay this debt are funded from the Term Loan B and equity contributions.
(iii) Capitalized Buyer Transaction Costs. Under Section 263 of the Code and the regulations thereunder (including Treasury Regulations § 1.263(a)-5), certain costs incurred by the buyer in connection with the acquisition must be capitalized into the buyer's basis in the acquired assets, rather than currently deducted. Capitalizable acquisition costs include, without limitation:
• Legal fees of Calderwood & Harkness LLP attributable to the acquisition;
• Advisory and investment banking fees of Osprey Bancroft & Co. LLC;
• Financial due diligence fees of Glenmore Thornton LLP;
• Brokerage and finder's fees, including the Peregrine broker fee of $680,000;
• Representations and warranties insurance premium paid to Northfield Assurance Ltd. of $13,600,000;
• Regulatory filing fees (including Hart-Scott-Rodino Act filing fees, CMA filing fees in the United Kingdom, and equivalent filings in other jurisdictions); and
• Other third-party costs directly related to the consummation of the acquisition.
The treatment of the R&W insurance premium ($13,600,000) warrants specific analysis. This is a buyer-side cost, and the question of whether it is capitalizable into the basis of the acquired assets or separately deductible (or amortizable over the term of the policy) is addressed in the separate memorandum on the deductibility of transaction costs dated June 20, 2024. For purposes of this memorandum, we assume that the R&W premium is capitalizable into the basis of the acquired assets and is therefore included in the Total Allocable Amount, subject to the conclusions of the June 20 memorandum.
(iv) Rollover Equity. The $616,055,952 in rollover equity contributed by Jonathan Hargrove and Pinnacle Growth Ventures LLC represents value delivered to the rollover participants in exchange for their Cloudium shares. For Section 1060 purposes, the rollover equity is included in the total consideration because the fair market value of the equity received by the rollover participants in the Surviving Corporation constitutes consideration for the acquisition of their Cloudium shares, which form part of the aggregate pool of 184,200,000 shares acquired by Fund VI (directly or constructively) in the merger. The rollover equity does not reduce the total purchase price for allocation purposes.
(v) Escrow. The $544,000,000 indemnity escrow (representing 8% of the headline deal value) deposited with Cobalt Trust Company at closing constitutes a portion of the merger consideration that has been set aside to secure the indemnification obligations of the former Cloudium shareholders under the Merger Agreement. For allocation purposes, the full $6,800,000,000 is treated as consideration paid at closing, regardless of the escrow mechanics. The escrow is not treated as contingent consideration; rather, it is a holdback from amounts otherwise payable to the sellers. The implications of potential escrow recoveries (i.e., funds returned to the buyer in satisfaction of indemnification claims) are discussed in Section IX of this memorandum.
(vi) Working-Capital Adjustment. Section 2.7 of the Merger Agreement provides for a post-closing working-capital true-up based on a comparison of actual closing working capital to the target working-capital amount specified in the Merger Agreement. If actual closing working capital exceeds the target, the purchase price will be increased by the excess; if actual closing working capital is less than the target, the purchase price will be decreased by the shortfall. Any such adjustment will modify the Total Allocable Amount and require a reallocation of the purchase price among the asset classes, as well as the filing of a supplemental Form 8594 by both parties.
B. Calculation of Total Allocable Amount
Based on the foregoing components, the preliminary calculation of the Total Allocable Amount for Section 1060 purposes is as follows:
The precise Total Allocable Amount will be finalized upon completion of the closing balance sheet review by Glenmore Thornton LLP and the determination of the actual amount of assumed liabilities and capitalized buyer transaction costs. We note that the assumed liabilities will include, among other items, Cloudium's deferred revenue balance, which for a SaaS business of Cloudium's scale is expected to be material (Cloudium's deferred revenue as of its most recent quarterly report was approximately $435,000,000). The treatment of assumed deferred revenue in the purchase price allocation — and its interaction with the revenue recognition and tax accounting rules — will be addressed in coordination with Glenmore Thornton's valuation team.
V. PROPOSED ALLOCATION AMONG ASSET CLASSES
A. Methodology and Coordination with Glenmore Thornton LLP
Glenmore Thornton LLP has been engaged by Fund VI to prepare independent fair market value appraisals of Cloudium's tangible and intangible assets for purposes of the purchase price allocation. The engagement is being led by Richard Okamura (Lead Partner, Transaction Tax) and Vanessa Liu (Lead Partner, Financial Due Diligence). The scope of Glenmore Thornton's engagement encompasses:
(a) Identification and valuation of all material tangible assets of Cloudium and its subsidiaries;
(b) Identification and valuation of all material intangible assets of Cloudium and its subsidiaries, including developed technology and software, customer relationships, trade names and trademarks, covenants not to compete, assembled workforce (for purposes of informing the valuation of other intangibles and goodwill), favorable contracts (if any), and backlog;
(c) Determination of the fair market value of each identified asset (or category of assets) using generally accepted valuation methodologies, including the income approach (Discounted cash flow analysis, relief from royalty method, multi-period excess earnings method), the market approach (comparable transactions, guideline public company method), and the cost approach (replacement cost new less depreciation) as appropriate for each asset category;
(d) Preparation of a comprehensive valuation report supporting the proposed allocation, suitable for use in connection with IRS Form 8594 reporting and defensible in the event of an IRS audit or challenge; and
(e) Coordination with Calderwood & Harkness LLP to ensure that the proposed allocation complies with the requirements of Section 1060, the residual method, and all applicable Treasury Regulations.
Calderwood & Harkness LLP will review Glenmore Thornton's proposed allocation for legal sufficiency and compliance with Section 1060, and will provide guidance on the appropriate classification of assets among the seven IRS asset classes. The final allocation will be jointly agreed upon among counsel and advisors and recommended to Solara for approval.
B. Preliminary Allocation by Asset Class
The following sections set forth our preliminary views on the expected allocation of the Total Allocable Amount to each of the seven IRS asset classes. All figures are preliminary and subject to completion of Glenmore Thornton's independent appraisal work. We expect that the final allocation will be available by approximately October 2024, following the completion of the independent valuations and the finalization of the closing balance sheet.
Class I — Cash and Cash Equivalents
Cloudium's projected closing-date cash and cash equivalents balance is approximately $180,000,000, based on management's most recent projections and treasury reporting. This amount includes all demand deposits, money market funds, and other items that qualify as cash equivalents under generally accepted accounting principles.
Under the residual method, Class I assets are allocated at their face value, as there is no material difference between the face value and fair market value of cash and cash equivalents.
Preliminary Allocation — Class I: ~$180,000,000
Class II — Actively Traded Personal Property
Based on our review of Cloudium's financial statements and the due diligence materials provided, Cloudium does not hold any material positions in publicly traded securities, certificates of deposit (other than those included in its cash and cash equivalents balance), or foreign currency that would constitute Class II assets. Cloudium's treasury function maintains cash balances in U.S. dollars, British pounds sterling, and euros, but these are operational balances that are properly classified as Class I cash equivalents rather than Class II actively traded property.
Preliminary Allocation — Class II: $0
Class III — Accounts Receivable and Debt Instruments
Cloudium's trade accounts receivable represent amounts due from its SaaS subscription customers for invoiced but unpaid subscription fees, professional services fees, and related charges. The fair market value of these receivables for allocation purposes will be determined based on a collectibility analysis, taking into account Cloudium's historical bad debt experience, the creditworthiness of its customer base, the aging of outstanding receivables, and any specific reserves for uncollectible accounts.
As a SaaS company serving mid-market and enterprise customers, Cloudium's receivables portfolio is expected to have a relatively high collectibility rate. Cloudium's customer base includes large, creditworthy organizations, including its largest customer, Aegis Federal Solutions Inc., a U.S. government contractor that accounts for $84,000,000 in ARR. Receivables from Aegis and similar enterprise customers are expected to have a high probability of collection and minimal discount from face value.
The estimated fair market value of Class III assets will be determined by Glenmore Thornton based on a detailed analysis of the receivables portfolio at the closing date. Based on preliminary information, we expect the Class III allocation to fall in the range of $200,000,000 to $250,000,000.
Preliminary Allocation — Class III: ~$200,000,000–$250,000,000
Class IV — Inventory
Cloudium is a cloud-native SaaS company that delivers its software platform as a service over the internet. The company does not manufacture, distribute, or sell physical products and does not maintain traditional inventory. Any physical media, hardware appliances, or similar items held by Cloudium are expected to be de minimis.
Preliminary Allocation — Class IV: $0 (or nominal)
Class V — Tangible and Intangible Assets (Other Than Goodwill / Going-Concern Value)
Class V is expected to be the most significant allocation class (together with Class VII) in this transaction, reflecting the intangible-asset-intensive nature of Cloudium's SaaS business. For purposes of analysis, we subdivide Class V into tangible assets and intangible assets.
(i) Tangible Assets (Class V). Cloudium's tangible asset base is relatively modest for a company of its size and revenue, consistent with its cloud-native, asset-light operating model. The principal categories of tangible assets include:
• Office Equipment, Furniture, and Fixtures: Computers, workstations, office furniture, and related equipment located across Cloudium's global offices, including the San Francisco headquarters at 600 Townsend Street, the London and Manchester offices of Cloudium Technologies UK Ltd., the Bangalore office of Cloudium Technologies India Pvt. Ltd., and the Berlin office of Cloudium Solutions GmbH.
• Leasehold Improvements: Tenant improvements and build-outs at Cloudium's leased office facilities. The San Francisco headquarters is the largest leased facility, with approximately 85,000 square feet of Class A office space.
• IT Infrastructure: Servers, networking equipment, data center equipment, and related hardware. However, we note that Cloudium operates its SaaS platform primarily on third-party cloud infrastructure (Ridgeway Industries and Crestline Systems), and therefore its on-premise IT infrastructure is limited to corporate IT systems and development environments.
• Other Tangible Personal Property: Miscellaneous tangible assets, including vehicles (if any) and other items of tangible personal property.
The aggregate fair market value of Cloudium's tangible assets is expected to be relatively modest. Based on Cloudium's most recent balance sheet and our preliminary review of the fixed asset schedules, we estimate the tangible asset allocation in the range of $50,000,000 to $100,000,000. Glenmore Thornton will perform a detailed appraisal of all tangible assets, including a physical inspection (or review of asset listings) and application of the cost approach (replacement cost new less depreciation) and market approach as appropriate.
Preliminary Allocation — Class V Tangible Assets: ~$50,000,000–$100,000,000
(ii) Intangible Assets (Class V / Class VI). The identified intangible assets of Cloudium are expected to constitute the largest portion of the purchase price allocation (other than residual goodwill). The following are the principal categories of identified intangible assets:
Developed Technology / Software Platform. Cloudium's core proprietary technology platform is a cloud-native, multi-tenant SaaS platform that provides integrated ERP, CRM, and business intelligence capabilities to mid-market and enterprise customers. The platform represents the culmination of years of R&D investment, including contributions from Cloudium's approximately 2,400-person R&D center in Bangalore, India. The developed technology encompasses the source code, software architecture, algorithms, databases, user interfaces, APIs, and related technology components that constitute the Cloudium platform.
The developed technology is expected to be the single largest identified intangible asset in the purchase price allocation. The valuation of the developed technology will be conducted by Glenmore Thornton using the income approach, specifically the relief from royalty method (which estimates the value of the technology by reference to the royalty payments that the owner would be relieved from making if it owned the technology outright, rather than licensing it from a third party) and/or the multi-period excess earnings method (which values the technology based on the excess earnings attributable to the technology after deducting contributory asset charges for other assets employed in the business).
Based on comparable transaction data for enterprise SaaS platforms with similar revenue profiles, growth rates, and market positions, and preliminary discussions with Glenmore Thornton's valuation team, the developed technology is preliminarily indicated to have a fair market value in the range of $1,500,000,000 to $2,500,000,000. This is a wide range and will be narrowed significantly as Glenmore Thornton completes its analysis.
Customer Relationships. Cloudium has developed a substantial installed base of mid-market and enterprise SaaS subscription customers. Customer relationships represent the value of Cloudium's existing customer base, including the contractual and non-contractual relationships with those customers that give rise to recurring revenue streams. In the SaaS business model, customer relationships are particularly valuable because of the high switching costs, long contract durations, and high customer retention rates that characterize enterprise SaaS subscriptions.
Key attributes of Cloudium's customer relationships include:
• ARR of $1,740,000,000 as of December 31, 2023, reflecting a large and growing installed base;
• LTM revenue of $1,620,000,000 for the fiscal year ended September 30, 2023;
• High customer retention rates, with gross revenue retention typically in excess of 90% and net revenue retention (including upsell and expansion) typically in excess of 110%, consistent with best-in-class enterprise SaaS benchmarks;
• A diversified customer base spanning multiple industries and geographies, with key relationships including Aegis Federal Solutions Inc. ($84,000,000 ARR), Helix Data Systems GmbH (technology licensing relationship), and numerous other enterprise accounts; and
• Multi-year SaaS subscription contracts with annual or multi-year payment terms, providing predictable recurring revenue visibility.
Customer relationships will be valued by Glenmore Thornton using the multi-period excess earnings method ("MPEEM"), which is the most widely accepted valuation methodology for customer relationship intangibles. The MPEEM values the customer relationships based on the projected after-tax excess earnings attributable to the existing customer base, after deducting contributory asset charges for other assets (including the technology platform, trade name, assembled workforce, and tangible assets) that contribute to the generation of customer-related revenue.
The preliminary indication of value for customer relationships is in the range of $1,000,000,000 to $1,800,000,000.
Trade Names and Trademarks. The "Cloudium" brand and associated trademarks represent a recognized and established brand in the enterprise SaaS market. The trade name has brand awareness and credibility among the company's target customer segments (mid-market and enterprise buyers of ERP, CRM, and business intelligence software) and contributes to the company's ability to attract new customers, retain existing customers, and command premium pricing relative to less-established competitors.
Trade names and trademarks will be valued by Glenmore Thornton using the relief from royalty method, which estimates the fair market value of the trade name by reference to the royalty that a hypothetical licensee would be willing to pay for the right to use the "Cloudium" trade name and associated trademarks. The royalty rate will be estimated based on comparable trademark license agreements in the software and technology industry, adjusted for factors specific to Cloudium, including brand strength, market position, and revenue contribution.
The preliminary indication of value for trade names and trademarks is in the range of $200,000,000 to $400,000,000.
Covenants Not to Compete. In connection with the transaction, Jonathan Hargrove (CEO) and Sienna Whitfield (CFO) have each entered into non-competition agreements dated January 22, 2024, pursuant to which they have agreed to refrain from competing with Cloudium's business for a specified period following the closing of the merger. The value of these covenants not to compete is determined by reference to the economic harm that would be suffered by the business if the covenantors were to compete — typically quantified using the "with-and-without" method or the "income differential" method, which compares the projected earnings of the business with the covenants in place against the projected earnings absent the covenants.
The allocation to covenants not to compete is typically a modest portion of the total purchase price in transactions of this type, as the value of the covenants is usually limited to the incremental earnings risk attributable to the specific covenantors and the duration of the non-compete period. Under Section 197(d)(1)(E), covenants not to compete entered into in connection with the acquisition of a trade or business are treated as Section 197 intangibles and are amortizable over 15 years on a straight-line basis.
The allocation to covenants not to compete will be determined by Glenmore Thornton and is expected to be a relatively small percentage of the total purchase price.
Assembled Workforce. Cloudium's assembled workforce of approximately 6,800 employees globally represents a significant asset of the business, particularly the skilled engineering, product development, and customer-facing teams that are essential to the continued operation and growth of the business. While the assembled workforce is recognized as a Section 197 intangible for certain purposes (see Section 197(d)(1)(C)(ii)), it is not separately identifiable for amortization purposes as a stand-alone Section 197 intangible. Rather, the value of the assembled workforce is subsumed within (and informs the valuation of) other intangible assets (particularly the developed technology and customer relationships) and residual goodwill. The value of the assembled workforce will be estimated by Glenmore Thornton for purposes of calculating contributory asset charges in the MPEEM, but will not be separately allocated as an identified intangible asset.
Favorable Contracts / Below-Market Leases. If Cloudium holds any material contracts that are on terms favorable relative to current market terms (including below-market lease agreements, favorable supply agreements, or favorable licensing arrangements), the incremental value of such favorable terms would be identified and allocated as a separate intangible asset. Glenmore Thornton will review Cloudium's material contracts as part of its analysis to determine whether any such favorable contracts exist and, if so, their fair market value.
Backlog. Cloudium's contracted but undelivered revenue — representing the aggregate value of SaaS subscription contracts that have been executed but for which service has not yet been fully delivered — constitutes an identifiable intangible asset referred to as "backlog." For a SaaS business with annual and multi-year subscription contracts, backlog can be a significant asset. The backlog will be valued based on the projected after-tax cash flows attributable to contracted future revenue, discounted at an appropriate rate reflecting the risk of the backlog (which is generally lower than the risk of projected revenue from new customers). Glenmore Thornton will quantify and value the backlog as part of its engagement.
Class VI — Section 197 Intangibles (Other Than Goodwill and Going-Concern Value)
As noted in Section III.B above, Class VI encompasses Section 197 intangibles other than goodwill and going-concern value. In practice, the distinction between Class V and Class VI intangible assets is nuanced and, for many types of intangible assets, the classification depends on the specific nature of the asset and the manner in which it was acquired. Under the residual method, both Class V and Class VI are allocated before Class VII (the residual goodwill class), and therefore the practical significance of the distinction between Class V and Class VI is limited: the key analytical question is the total allocation to all identified intangibles (Classes V and VI combined) versus the residual allocation to goodwill (Class VII).
For purposes of this memorandum, we treat the identified intangible assets described above — including developed technology, customer relationships, trade names and trademarks, covenants not to compete, favorable contracts (if any), and backlog — as falling within Classes V and/or VI, depending on their specific classification. Calderwood & Harkness LLP will work with Glenmore Thornton to ensure that each identified intangible asset is properly classified within the appropriate asset class, but the economic impact of the V/VI classification is not expected to be material.
All identified Section 197 intangibles other than goodwill and going-concern value that are not properly classified as Class V assets will be allocated to Class VI. The aggregate Class VI allocation will be determined upon completion of Glenmore Thornton's work.
Class VII — Goodwill and Going-Concern Value (Residual)
All remaining consideration, after allocation of the Total Allocable Amount to Classes I through VI, will be assigned to Class VII as goodwill and going-concern value. Given the premium acquisition multiple of 16.8x LTM EBITDA and the nature of Cloudium's SaaS business — which commands premium multiples due to its high recurring revenue, strong customer retention, and significant growth prospects — a substantial residual goodwill allocation is expected.
The residual goodwill allocation will reflect the component of value attributable to factors such as:
• The expectancy of continued customer patronage beyond the identified customer relationship intangible;
• Cloudium's market position and competitive advantages;
• The value of future customer acquisitions and growth opportunities;
• Synergies expected to be realized by Fund VI (to the extent reflected in the price paid);
• The quality and depth of Cloudium's management team and organizational culture; and
• Other intangible factors that contribute to the going-concern value of the business but are not separately identifiable.
Based on the preliminary ranges for identified intangible assets set forth above, and assuming a Total Allocable Amount in the range of $7.0 billion to $7.2 billion, the residual goodwill allocation is preliminarily estimated in the range of $2,000,000,000 to $3,500,000,000. This range is wide because it is residual — it depends entirely on the final fair market valuations of the identified intangible assets in Classes V and VI, and small changes in those valuations will have a disproportionate impact on the residual goodwill figure.
Like all other Section 197 intangibles, goodwill is amortizable on a straight-line basis over 15 years beginning with the month of acquisition (July 2024).
Preliminary Allocation — Class VII: ~$2,000,000,000–$3,500,000,000 (residual)
C. Summary Allocation Table (Preliminary / Illustrative)
The following table summarizes the preliminary illustrative allocation of the purchase price among the seven IRS asset classes. All figures are preliminary, subject to completion of Glenmore Thornton's independent valuation work and finalization of the closing balance sheet, and are presented for discussion purposes only.
Note: All figures are preliminary and subject to completion of Glenmore Thornton LLP's independent appraisal. The distinction between Class V and Class VI intangible assets will be finalized in the course of the valuation engagement. The residual goodwill figure in Class VII is the balancing amount after allocation to all other classes and is therefore dependent on the final valuations of identified assets.
VI. TAX AMORTIZATION AND DEPRECIATION CONSIDERATIONS
A. Section 197 Amortization Schedule
All intangible assets that qualify as Section 197 intangibles — including goodwill (Class VII), customer relationships, developed technology, trade names and trademarks, covenants not to compete, and other identified intangible assets in Classes V and VI — are amortizable on a straight-line basis over a 15-year period beginning in the month of acquisition. Since the merger is expected to close on July 9, 2024, the 15-year amortization period will begin in July 2024 and will expire in June 2039.
For illustrative purposes, if the total aggregate allocation to Section 197 intangibles (encompassing all of Classes V intangibles, Class VI intangibles, and Class VII goodwill) is approximately $5,500,000,000 to $6,500,000,000, the resulting annual straight-line amortization deduction would be as follows:
These annual amortization deductions represent a significant tax shield for Fund VI and its limited partners. At an assumed blended federal and state effective tax rate of approximately 25%, the annual tax savings from amortization alone would range from approximately $92,000,000 to $108,000,000 per year.
We note that the anti-churning rules of Section 197(f)(9) are not applicable to this transaction. Those rules prevent amortization of certain Section 197 intangibles that were held by the taxpayer or a related party prior to the enactment of Section 197 (August 10, 1993) or that were acquired in a non-recognition transaction from a related party. In this case, Cloudium's intangible assets were not previously held by Fund VI or any party related to Fund VI, and the acquisition is an arm's-length transaction between unrelated parties. Accordingly, Section 197(f)(9) does not impose any limitation on Fund VI's ability to amortize the acquired intangible assets.
B. Tangible Asset Depreciation
Tangible personal property allocated to Class V will be depreciable under the Modified Accelerated Cost Recovery System ("MACRS") provisions of Section 168 of the Code. The applicable MACRS recovery periods and conventions for the principal categories of Cloudium's tangible assets are as follows:
• Computer Equipment and Related Technology Hardware: 5-year recovery period under MACRS (asset class 00.12). This includes servers, networking equipment, workstations, and other computer hardware.
• Office Furniture and Fixtures: 7-year recovery period under MACRS (asset class 00.11). This includes desks, chairs, filing cabinets, conference room furniture, and other office furnishings.
• Leasehold Improvements: 15-year recovery period under MACRS (Section 168(e)(6)), or the shorter remaining term of the lease if the improvement is reasonably expected to be abandoned at lease expiration. Leasehold improvements are depreciated using the straight-line method under the half-year or mid-month convention, as applicable.
With respect to bonus depreciation under Section 168(k), we note that the 100% first-year bonus depreciation that was available for qualifying property placed in service through December 31, 2022 has been subject to a phase-down for property placed in service in subsequent years. For property placed in service during calendar year 2024, the bonus depreciation percentage is 60% (phasing down from 80% in 2023). The availability of bonus depreciation for specific categories of Cloudium's tangible assets will be analyzed as part of the allocation finalization process. To the extent applicable, bonus depreciation would allow Fund VI to deduct 60% of the cost of qualifying tangible property in the year of acquisition, with the remaining 40% depreciated over the applicable MACRS recovery period.
C. Impact on Fund VI Returns
Fund VI is organized as a Delaware limited partnership and is treated as a partnership for federal income tax purposes. As a partnership, Fund VI itself does not pay federal income tax; rather, items of income, gain, loss, deduction, and credit — including depreciation and amortization deductions — flow through to Fund VI's partners (the limited partners and the general partner) in accordance with the terms of the partnership agreement and Sections 702 and 704 of the Code.