IBM 2004 Annual Report Download - page 62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
60
ibm annual report 2004
Overall
The company’s acquisitions were accounted for as purchase transactions, and accordingly,
the assets and liabilities of the acquired entities were recorded at their estimated fair
values at the dates of acquisition. The company determines fair value through third-party
appraisals and assumptions provided by management.
The acquired tangible net assets comprise primarily cash, accounts receivable, land,
buildings and leasehold improvements. The acquired identifiable intangible assets com-
prise primarily completed technology, trademarks, client lists, employee agreements and
leasehold interests. The identifiable intangible assets are amortized on a straight-line basis,
generally not to exceed seven years. Goodwill from acquisitions that were consummated
prior to July 1, 2001, was amortized over five years. The company adopted SFAS No. 142,
“Goodwill and Other Intangible Assets,” on January 1, 2002, and ceased amortizing good-
will as of that date. The results of operations of all acquired businesses were included in
the company’s Consolidated Financial Statements from the respective dates of acquisition.
divestitures
2004
On December 7, 2004, the company signed an agreement to sell its Personal Computing
Division (a division of the Personal Systems Group segment) to Lenovo Group Limited, a
publicly traded company in China. Lenovo Group will acquire substantially all the assets
and assume certain liabilities of the Personal Computing Division. Under the terms of the
agreement, IBM will receive consideration at closing in the form of cash and equity in Lenovo
Group. IBM, as part of the agreement, retained the right and will be given a preference to
provide maintenance, warranty and financing services to Lenovo Group. In addition, IBM
will provide certain agreed to transition services to Lenovo Group. This transaction is
expected to close in the second quarter of 2005.
2002
On December 31, 2002, the company sold its HDD business to Hitachi. The total gross
proceeds of the sale were $2 billion (excluding purchase price adjustments), of which
$1,414 million was received by the company at closing. According to the terms of the
agreement, the remaining proceeds were to be received one and three years after closing.
The remaining proceeds are fixed and are not dependent or variable based upon the sold
business’ earnings or performance. The company transferred approximately $244 million
of cash as part of the HDD business, resulting in a net cash inflow in 2002 related to the
HDD transaction of $1,170 million. The company received approximately $156 million
from Hitachi on December 31, 2003 for the payment due one year after closing and paid
approximately $59 million to Hitachi for certain contractual items resulting in a net cash
inflow in 2003 of $97 million.
The company paid $3,266 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 convert-
ible 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 shares and the compensation element 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 the company’s people and space was approximately
$318 million, substantially all of which 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 is included in the table on page 59. Also see page
76 for additional information on these initiatives.
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, “Business Combinations.” The remaining items that generated goodwill are
synergies 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 4.8 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 acquisi-
tions were for software companies, including Crossworlds Software, Inc., and Access360.
The other five acquisitions were Strategic Outsourcing and Business Consulting Services
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 balance to the Global Services segment. The
goodwill is not deductible for tax purposes. The overall weighted-average life of the
intangible assets purchased is 3.4 years. The results of operations of the acquired busi-
nesses were included in the company’s Consolidated Financial Statements from the
respective dates of acquisition.