EMC 2003 Annual Report Download - page 46

transaction costs, which primarily consisted of fees paid for financial advisory, legal and accounting services. We issued approximately 115 million shares of
our Common Stock, the fair value of which was based upon a five-day average of the closing price two days before and two days after the terms of the
acquisition were agreed to and publicly announced. The fair value of our stock options issued to employees was estimated using a Black-Scholes option
pricing model. The fair value of the stock-options was estimated assuming no expected dividends and the following weighted-average assumptions:
Expected life (in years) 4.0
Expected volatility 60.0%
Risk free interest rate 1.5%
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EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
The intrinsic value allocated to the unvested options issued in the transaction that had yet to be earned as of the transaction date was approximately
$27.2 million and has been recorded as deferred compensation in the purchase price allocation.
The consolidated financial statements include the results of Documentum from the date of acquisition. The purchase price has been allocated based on
estimated fair values as of the acquisition date. The purchase price allocation is preliminary and a final determination of required purchase accounting
adjustments will be made upon the completion of our integration plans. The following represents the preliminary allocation of the purchase price (table in
thousands):
Current assets $ 367,534
Property, plant & equipment 17,481
Goodwill 1,427,131
Intangible assets:
Customer relationships (estimated useful life of 12 years) 130,050
Developed technology (estimated useful life of 5 years) 97,440
Tradenames and trademarks (estimated useful life of 5 years) 7,150
Acquired IPR&D 9,500
Total intangible assets 244,140
Deferred compensation 27,186
Other long-term assets 13,558
Current liabilities (128,151)
Deferred income taxes (10,603)
Long-term convertible debt (129,966)
Long-term liabilities (10,346)
Fair value of the convertible debt conversion feature (26,284)
Total purchase price $ 1,791,680
In determining the purchase price allocation, we considered, among other factors, our intention to use the acquired assets, historical demand and
estimates of future demand of Documentum's products and services. The fair value of intangible assets was primarily based upon the income approach. The
rate used to discount the net cash flows to their present values was based upon a weighted average cost of capital of 15%. The discount rate was determined
after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital and the risk associated with achieving
forecasted sales related to the technology and assets acquired from Documentum.
The total weighted average amortization period for the intangible assets is 8.9 years. The intangible assets are being amortized based upon the pattern in
which the economic benefits of the intangible assets are being utilized. None of the goodwill is deductible for income tax purposes. The $1.4 billion of
goodwill is classified within our Documentum products and services segment, information storage products segment and LEGATO products and services
segment in the amounts of $1,072.1 million, $268.0 million and $87.0 million, respectively.
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EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
Of the $244.1 million of acquired intangible assets, $9.5 million was allocated to IPR&D and was written off at the date of acquisition because the
IPR&D had no alternative uses and had not reached technological feasibility. The write-off is included in restructuring and other special charges in our
statement of operations. Four IPR&D projects were identified relating to content management and collaboration software. The value assigned to IPR&D was
determined utilizing the income approach by determining cash flow projections relating to the projects. The stage of completion of each in process project was
estimated to determine the discount rate to be applied to the valuation of the in process technology. Based upon the level of completion and the risk associated
with in process technology, a discount rate of 40% was deemed appropriate for valuing IPR&D.
In connection with the Documentum acquisition, we commenced integration activities which have resulted in involuntary terminations and lease
terminations. The liability for involuntary termination benefits covers approximately 30 employees, primarily in general and administrative functions. We
expect to pay the remaining balance for involuntary termination benefits in 2004. The liability for leases will be paid over their remaining lease terms through
2008. We are working to finalize our integration plans which may result in additional involuntary terminations, lease and other contractual terminations and