EMC 2006 Annual Report Download - page 62

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The purchase price has been allocated based on estimated fair values as of the acquisition date. The following represents the final allocation of the
purchase price (table in thousands):
Current assets $ 12,395
Property, plant and equipment 1,635
Other long-term assets 374
Goodwill 264,245
Intangible assets:
Developed technology (weighted-average useful life of 4.4 years) 42,530
Customer relationships (weighted-average useful life of 7.1 years) 22,800
Tradenames and trademarks (weighted-average useful life of 5.0 years) 2,000
Non-competition agreements (weighted-average useful life of 3.0 years) 750
Acquired IPR&D 14,270
Total intangible assets 82,350
Deferred compensation 8,000
Current liabilities (30,695)
Deferred income taxes (14,949)
Long-term liabilities (766)
Total purchase price $ 322,589
In determining the purchase price allocation, we considered, among other factors, our intention to use the acquired assets and historical demand and
estimates of future demand of Captiva'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 Captiva.
The total weighted average amortization period for the intangible assets is 5.3 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 goodwill is classified
within our content management and archiving segment.
Of the $82.4 million of acquired intangible assets, $14.3 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 value assigned to IPR&D was determined utilizing the income approach by
determining cash flow projections relating to the IPR&D 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, we
deemed a discount rate of 30% as appropriate for valuing IPR&D.
In connection with the Captiva acquisition, we commenced integration activities which have resulted in recognizing $4.0 million in liabilities for
employee termination benefits and $1.2 million for lease and contract terminations, of which $1.3 million was paid through December 31, 2006. We expect to
pay the liabilities associated with the employee termination benefits through 2007 and the liabilities associated with the lease and contract terminations
through 2009.
Acquisition of System Management Arts, Inc.
In February 2005, we acquired all of the outstanding capital stock of System Management Arts, Inc. ("Smarts"). Smarts' software products
automatically locate root-cause problems, calculate their impact across technology domains and present the logical action plan required to keep business
services up and running. The acquisition enables us to offer event automation and real-time network systems management software. Additionally, the
acquisition enables us to apply the modeling, correlation and root-cause analysis technology to expand our information and storage management offerings.
The purchase price, net of cash received, was $293.5 million, which consisted of $252.6 million of cash, $37.4 million in fair value of our stock options
and $3.5 million of transaction costs, which primarily consisted of fees paid for financial advisory, legal
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