EMC 2007 Annual Report Download - page 71

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 45.0%
Risk-free interest rate 2.7%
The intrinsic value allocated to the unvested options issued in the acquisition that had yet to be earned as of the acquisition date was $3.5 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 Smarts from the date of acquisition. 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 $ 21,077
Property, plant and equipment 7,596
Other long-term assets 533
Goodwill 266,000
Intangible assets:
Developed technology (weighted-average useful life of 6.4 years) 24,870
Customer relationships (weighted-average useful life of 5.7 years) 16,170
Tradenames and trademarks (weighted-average useful life of 6.6 years) 1,660
Non-solicitation agreements (weighted-average useful life of 3.0 years) 1,570
Acquired IPR&D 3,100
Total intangible assets 47,370
Deferred compensation 3,536
Current liabilities (33,059)
Deferred income taxes (12,215)
Long-term liabilities (7,354)
Total purchase price $ 293,484
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 Smarts' 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 16%. 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 Smarts.
The total weighted average amortization period for the intangible assets is 6.0 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 Information Storage segment.
Of the $47.4 million of acquired intangible assets, $3.1 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 40% as appropriate for valuing IPR&D.
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