EMC 2006 Annual Report Download - page 64

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Acquisition of VMware, Inc.
In January 2004, we acquired all of the shares of outstanding stock of VMware, Inc. ("VMware"), a software company specializing in virtualization
technology. VMware's technology enables multiple operating systems to run simultaneously and independently on the same Intel-based server or workstation
and move live applications across systems without business disruption. We determined that the acquisition advances our goal of simplifying the information
technology operations of our customers. The purchase price, net of cash received, was approximately $613.1 million, which consisted of $539.4 million of
cash, $72.0 million in fair value of our stock options and $1.7 million of transaction costs, which primarily consisted of fees paid for financial advisory, legal
and accounting services. 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 2.0%
The intrinsic value allocated to the unvested options issued in the acquisition that had yet to be earned as of the acquisition date was $47.3 million and
was initially recorded as deferred compensation in the purchase price allocation. As a result of our adoption of FAS No. 123R in 2006, we reclassified all
deferred compensation balances to additional paid-in capital.
The consolidated financial statements include the results of VMware from the date of acquisition. The following represents the final allocation of the
purchase price (table in thousands):
Current assets $ 18,644
Property, plant and equipment 2,472
Other long-term assets 1,520
Goodwill 518,581
Intangible assets:
Developed technology (weighted-average useful life of 4.6 years) 93,610
Support and subscription contracts (weighted-average useful life of 9.0 years) 3,950
OEM contracts (weighted-average useful life of 5.0 years) 5,570
Tradenames and trademarks (weighted-average useful life of 5.0 years) 7,580
Non-solicitation agreements (weighted-average useful life of 3.0 years) 40
Acquired IPR&D 15,200
Total intangible assets 125,950
Deferred compensation 47,300
Current liabilities (81,241)
Deferred income taxes (16,444)
Long-term liabilities (3,670)
Total purchase price $ 613,112
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 VMware'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 14%. 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
forecast sales related to the technology and assets acquired from VMware.
The total weighted-average amortization period for the intangible assets is 4.8 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 VMware virtual infrastructure segment.
Of the $126.0 million of acquired intangible assets, $15.2 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
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