Business Acquisitions

The Consolidated Financial Statements include the operating results of the acquired businesses described below from the respective dates of acquisition. Pro forma results of operations have not been presented as the prior-period financial results of the acquired businesses are not considered material to the Company. None of the goodwill was deductible for tax purposes.

Fusion‑io, Inc. On July 23, 2014, the Company acquired 100% of Fusion‑io, a leading developer of flash-based, Peripheral Component Interconnect Express (“PCIe”) hardware and software solutions that enhance application performance in enterprise and hyperscale data centers. The Company expects this acquisition to accelerate its efforts to enable the flash-transformed data center, helping companies better manage increasingly heavy data workloads at a lower total cost of ownership. The total aggregate consideration to acquire Fusion-io was $1.26 billion and comprised of the following (in thousands):



	Purchase Price
Cash consideration	$	1,256,502
Fair value of assumed equity attributed to pre-combination service	7,041
Total purchase price	$	1,263,543

The total aggregate consideration net of cash assumed was $1.07 billion.

The Company assumed all of Fusion‑io’s outstanding unvested stock option awards with an exercise price less than or equal to the acquisition price of $11.25 per share and unvested RSU awards. The assumed unvested stock options converted into 427,388 options to purchase the Company’s common stock and the assumed unvested RSUs converted into 445,072 RSU awards.

The weighted-average fair value of the assumed unvested stock option awards was $35.02 and was determined using the Black-Scholes-Merton valuation model and included the following assumptions:



Dividend yield	1.14%
Expected volatility	0.32
Risk-free interest rate	1.00%
Weighted average expected life	2.6 years

The fair value of the assumed unvested RSU awards was based on the Company’s acquisition-date share value of $94.35 per share.

The fair value of the assumed unvested stock option and RSU awards attributed to post-combination services of $49.9 million was not included in the consideration transferred and will be recognized over the awards’ remaining requisite service periods.

The following table presents the fair values of the tangible and intangible assets acquired and liabilities assumed from, and goodwill attributed to, the Fusion‑io acquisition as of July 23, 2014, and reflects adjustments made during the open measurement period to finalize the purchase accounting (in thousands):



Cash	$	190,336
Accounts receivable, net	67,666
Inventory	76,780
Deferred tax asset, net	54,490
Finite-lived intangible assets	382,000
IPR&D	61,000
Goodwill	513,398
Other assets	30,498
Other current liabilities	(94,016		)
Other non-current liabilities	(18,609		)
Total purchase price	$	1,263,543

Goodwill in the table above was reduced by $29.3 million during the three months ended December 28, 2014 in connection with the finalization of the purchase accounting, due primarily to the recognition of deferred tax assets associated with the divestiture of the io‑Control product line of Fusion‑io. The divestiture of the product line was deemed immaterial to the Company’s Consolidated Financial Statements.

The following table presents the fair value of the intangible assets acquired (in thousands):



	Weighted-Average Useful Lives	Fair Value
Intangible assets:
Developed technology	5 years	$	271,000
Customer relationships	1.5 years	57,000
Trademark and trade names	5 years	54,000
IPR&D		61,000
Total intangible assets acquired, excluding goodwill		$	443,000

The initial weighted-average amortization period for the finite-lived intangible assets was 4.5 years. The intangible assets are amortized on a straight-line basis over the period which the economic benefits of the intangible assets are expected to be utilized. The goodwill resulted from expected synergies from the transaction, including complementary products that will enhance the Company’s overall product portfolio.

In-process Research and Development. A portion of the Fusion‑io purchase price was allocated to acquired IPR&D. The value of the IPR&D project was determined by estimating the future net cash flows and by discounting them to their present values, which represents an established valuation technique in the high-technology computer industry.

The net cash flows from the IPR&D project were based on estimates of revenues, costs of revenues, research and development expenses, including costs to complete the project, selling, marketing and administrative expenses, and income taxes from the project. The estimated net revenues and gross margins were based on projections of the project and were in line with industry averages. Estimated total net revenues from the project were expected to grow through fiscal year 2019 and to decline thereafter as other new technologies are expected to become available and the technology approaches the end of its life cycle. Estimated operating expenses included research and development expenses, which included costs to bring the project to technological feasibility and costs associated with ongoing maintenance after a product is released, as well as selling, marketing and administrative expenses based on historical and expected direct expenses. The Company believes the assumptions used in the valuation were reasonable at the time of the acquisition.

The effective tax rate used in the analysis of the IPR&D project reflects the Company’s structural tax rate based on the Company’s historical operating model and related tax planning. A discount rate (the rate utilized to discount the net cash flows to their present values) of 17.5% was used in computing the present value of net cash flows for the project. The percentage of completion was determined using costs incurred by Fusion-io prior to the acquisition date compared to the estimated remaining research and development to be completed to bring the project to technological feasibility.

Direct Acquisition-related Costs. Direct acquisition-related costs of $11.7 million during the fiscal year ended December 28, 2014 were related to legal, banker, accounting and tax fees, of which $2.6 million were expensed to General and administrative expense in the second quarter of fiscal year 2014, and $9.1 million were expensed to Restructuring and other expense in the second half of fiscal year 2014 in the Company’s Consolidated Statement of Operations.

SMART Storage Systems. On August 22, 2013, the Company completed its acquisition of SMART Storage, a developer of enterprise solid state drives (“SSDs”). The Company expects this acquisition to enhance its enterprise storage product portfolio. The Company acquired 100% of the outstanding shares of SMART Storage through an all-cash transaction. The total aggregate consideration to acquire SMART Storage was $305.1 million and comprised of the following (in thousands):



	Purchase Price
Cash consideration	$	304,982
Fair value of assumed stock options attributed to pre-combination service	136
Total purchase price	$	305,118

The Company assumed all outstanding unvested SMART Storage stock option awards, which were converted into 183,069 options to purchase the Company’s common stock. The fair value of these unvested stock options was determined using the Black-Scholes-Merton valuation model.

The weighted-average fair value of the assumed unvested stock option awards was $41.15 and was determined using the Black-Scholes-Merton valuation model and included the following assumptions:



Dividend yield	1.60%
Expected volatility	0.32
Risk-free interest rate	0.33%
Weighted average expected life	1.4 years

The fair value of the assumed unvested stock option attributed to post-combination services of $6.8 million was not included in the consideration transferred and will be recognized over the awards’ remaining requisite service periods.

The following table presents the fair values of the tangible and intangible assets acquired and liabilities assumed from, and goodwill attributed to, the SMART Storage acquisition as of August 22, 2013, and reflects adjustments made through the measurement period to finalize the purchase accounting (in thousands):



Cash	$	1,423
Accounts receivable, net	7,827
Inventory	29,331
Deferred taxes - current	921
Other current assets	28,002
Property and equipment	5,734
Deferred taxes - non-current	3,338
Finite-lived intangible assets	162,200
IPR&D	6,300
Goodwill	115,594
Other assets	149
Accounts payable	(11,746		)
Other current liabilities	(34,976		)
Other non-current liabilities	(8,979		)
Total purchase price	$	305,118

An existing $25.5 million liability that SMART Storage owed SMART Holdings, (the “Seller”), was not settled prior to the closing of the acquisition of SMART Storage in accordance with the purchase agreement. The Seller was contractually obligated to refund $25.5 million of the purchase price for this unsettled liability. As of December 29, 2013, the purchase price refund receivable and unsettled liability were recorded gross in Other current assets and Other current liabilities of the acquired tangible assets and liabilities of SMART Storage, respectively, as the Company did not have the legal right to offset. The Company settled the liability to the Seller and the Seller refunded the Company for the same amount in the first quarter of fiscal year 2014.

The following table presents the fair value of the intangible assets acquired (in thousands):



	Weighted-Average Useful Lives	Fair Value
Intangible assets:
Developed technology	4 years	$	146,100
Trademark and trade names	4 years	8,500
Customer relationships	2 years	7,600
IPR&D		6,300
Total intangible assets acquired, excluding goodwill		$	168,500

The initial weighted-average amortization period for the finite-lived intangible assets was 3.9 years. The intangible assets are amortized on a straight-line basis over the period which the economic benefits of the intangible assets are expected to be utilized. The goodwill resulted from expected synergies from the transaction, including the Company’s supply of NAND flash and complementary products that will enhance the Company’s overall product portfolio. The Company did not record a deferred tax liability due to certain tax incentives awarded by the Malaysian government.

Direct Acquisition-related Costs. Direct acquisition-related costs of $3.1 million during the fiscal year ended December 29, 2013 were related to legal, regulatory and accounting fees, and were expensed to General and administrative expense in the Consolidated Statement of Operations.