VMware 2009 Annual Report Download - page 85

Table of Contents
VMWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In accordance with the merger agreement, the number of VMware stock options into which assumed SpringSource stock options were
converted and the number of shares of restricted common stock that were issued were determined based on a ratio. The ratio was derived from
the per share merger consideration payable to holders of SpringSource capital stock and the ten-day trading average of VMware’s Class A
common stock two trading days immediately prior to September 15, 2009. The assumed vested and unvested stock options converted into
652,253 and 476,081, respectively, of VMware stock options to purchase Class A common stock with a weighted-average exercise price of
$4.87 per share. In addition, 572,492 shares of VMware Class A restricted common stock were issued to certain employees of SpringSource who
agreed to accept shares of VMware Class A common stock subject to vesting restrictions in lieu of a portion of their cash merger proceeds. The
shares are subject to vesting restrictions based upon continued employment with VMware. Subject to meeting the vesting requirements, the
holders of the shares will receive a guaranteed minimum value that is equivalent to the portion of their cash merger proceeds foregone to receive
the shares. To the extent that the fair value of the shares is less than the guaranteed minimum value, the difference will be paid in cash upon
vesting. At December 31, 2009, the fair value of shares exceeded the minimum value guarantee.
The Company included the fair value of the stock options assumed by VMware attributed to pre-combination services of $16.2 million in
the consideration transferred for the acquisition. The fair value of the stock options attributed to post-combination services and the fair value of
the restricted common stock of $44.6 million were not included in the consideration transferred and are being recognized as stock-based
compensation expense over their remaining requisite service periods. The fair value of the stock options was estimated using a Black-Scholes
option-pricing model with the following weighted-average assumptions: i) market price of $40.00 per share, which was the closing price of
VMware’s Class A common stock on the acquisition date; ii) expected term of 1.6 years; iii) risk-free interest rate of 0.7%; iv) annualized
volatility of 38.1%; and v) no dividend yield. The weighted-average acquisition-date fair value of the assumed stock options attributed to post-
combination services was $35.02. The fair value of the restricted common stock was based on the acquisition-date closing price of $40.00 per
share for VMware’s Class A common stock.
In connection with the acquisition, VMware also agreed to offer additional equity incentives to SpringSource employees. Accordingly,
VMware granted an aggregate of approximately 2.3 million stock options and 0.8 million restricted stock units under its 2007 Equity and
Incentive Plan shortly after the close of the acquisition. Stock-
based compensation expense of approximately $58 million will be recognized over
the four-year vesting term of the awards.
As of December 31, 2009, the accounting for the SpringSource acquisition had not been finalized due to pending items related to tax and
the current assets and liabilities recorded as a result of the acquisition. Based on a preliminary assessment, the Company has recorded provisional
amounts for these items in its consolidated financial statements. During the measurement period, VMware may record adjustments to the
provisional amounts recorded in the Company’s initial accounting for the acquisition.
82