IBM 2002 Annual Report Download - page 80

Notes to Consolidated Financial Statements
78 international business machines corporation and Subsidiary Companies
cAcquisitions/Divestitures
Acquisitions
2002
In 2002, the company completed 12 acquisitions at an aggre-
gate cost of $3,958 million.
The largest acquisition was PricewaterhouseCoopers
Consulting (PwCC). On October 1, 2002, the company pur-
chased PricewaterhouseCoopers’ (PwC) global business
consulting and technology services unit, PwCC, for $3,474
million. The acquisition of PwCC provides the company with
new expertise in business strategy, industry-based consulting,
process integration and application management. The pur-
chase price above includes an estimated amount of net
tangible assets to be transferred of approximately $422 mil-
lion. The recorded amount of net tangible assets transferred
to IBM from PwCon October 1, 2002, was approximately
$454 million higher than the estimate. The amount of recorded
net tangible assets transferred will be subject to a review
process between both parties under the terms of the agree-
ment. Therefore, although the net tangible assets recorded
by IBM include this incremental amount, such amounts may
be adjusted, dollar for dollar, in 2003 under the terms of the
agreement. Any cash settlement to either party resulting from
this process is estimated to occur in 2003 and may affect the
values assigned to assets acquired and liabilities assumed.
The company paid $2,852 million of the purchase price in
cash, $294 million primarily in the form of restricted shares
of IBM common stock and $328 million in notes convertible
into restricted shares of IBM common stock.
In connection with the acquisition, the company incurred
approximately $196 million of pre-tax, one-time compensation
costs for certain PwCC partners and employees. This amount
relates to restricted stock awards and the compensation ele-
ment of the convertible notes issued as part of the purchase
consideration and was recorded in the fourth quarter of 2002.
The portion of this amount recorded as part of SG&A in the
Consolidated Statement of Earnings as compensation expense
for the convertible notes equals the difference between the fair
value and the face value of the notes.
As a result of its acquisition of PwCC, the company
recorded a liability of approximately $601 million in the
fourth quarter of 2002 to rebalance its workforce and to vacate
excess leased space. All employees affected by this action were
notified as of December 31, 2002. The portion of the liability
relating to IBM people and space was approximately $318
million, and substantially all was recorded as part of SG&A in
the Consolidated Statement of Earnings. The portion of the
liability relating to acquired PwCC workforce and leased
space was approximately $283 million and was included as
part of the liabilities assumed for purchase accounting and are
presented in the following table.
The table below presents the allocation of purchase price
related to the 2002 acquisitions as of the respective dates of
acquisition.
amortization
(dollars in millions) life (in years)PwCC other
Current assets $«1,197 $«264
Fixed/non-current assets 199 102
Intangible assets:
Goodwill N/A 2,461 364
Completed technology 3—66
Strategic alliances 5103 «—
Non-contractual
customer relationships 4to 7131 «—
Customer contracts/backlog 3to 582 6
Other identifiable
intangible assets 3to 5«95 «««10
Total assets acquired «4,268 «812
Current liabilities (560) «(208)
Non-current liabilities (234) (124)
Total liabilities assumed «(794) (332)
Net assets acquired 3,474 480
In-process research
and development —4
Total purchase price $«3,474 $«484
PwCC Acquisition
Almost half of the goodwill was estimated to be generated by
the value of the acquired assembled workforce. The acquired
assembled workforce is treated as goodwill under SFAS No.
141. The remaining items that generated goodwill are syner-
gies between PwCC and the company created by the
combination, and the premium paid by the company for the
right to control PwCC. The goodwill has been assigned to
the Global Services segment. The company estimates that
approximately two-thirds of the goodwill is deductible for tax
purposes. The overall weighted-average life of amortizable
intangible assets purchased from PwCis approximately 5
years. The results of operations of PwCC were included in
the company’s Consolidated Financial Statements as of
October 1, 2002.
Other Acquisitions
The company paid cash for the other acquisitions. Six of
the acquisitions were for software companies, including
Crossworlds Software, Inc., and Access360. The other five
acquisitions were strategic outsourcing and business consulting
companies. The primary items that generated goodwill are the
synergies between the acquired businesses and the company,
and the premium paid by the company for the right to control
the businesses acquired. Approximately $300 million of the
goodwill has been assigned to the Software segment and the