Business Combinations, Intangibles and Goodwill

9 Months Ended

Sep. 30, 2012

Business Combination, Goodwill and Intangible Assets Disclosure [Abstract]

Business Combinations, Intangibles and Goodwill

Business Combinations, Intangibles and Goodwill

During the nine months ended September 30, 2012, we acquired seven companies. We acquired all of the outstanding capital stock of Pivotal Labs, a provider of services and technology to build Big Data applications; Likewise Software, a provider of technology for managing cross-platform access to data files and software for managing unstructured data; XtremIO, a provider of Flash enterprise storage systems; Watch4Net, a provider of enterprise and carrier-class performance management software; and Tiburon Technologies, a provider of support and modernization services for legacy database management systems. These acquisitions complement and expand our Information Storage segment. We also acquired all of the outstanding capital stock of Syncplicity, a provider of cloud-based synch and share file management which complements and expands our Information Intelligence Group segment, and Silicium Security, a provider of enterprise malware detection solutions which complements and expands our RSA Information Security segment. In connection with our acquisitions, we had adjustments to the fair value of previously held interests in XtremIO which resulted in a gain of $31.6 million which was recognized in other income (expense) in the second quarter of 2012. Additionally, during the nine months ended September 30, 2012, VMware acquired six companies, including the acquisition of Nicira, Inc. (“Nicira”), which is discussed further below.

The aggregate consideration for these thirteen acquisitions was $1,899.2 million which consisted of $1,878.1 million of cash consideration, net of cash acquired and $21.1 million for the fair value of our stock options granted in exchange for the acquirees’ stock options. The consideration paid was allocated to the fair value of the assets acquired and liabilities assumed based on estimated fair values as of the respective acquisition dates.

The aggregate allocation to goodwill, intangibles and net liabilities was approximately $1,583.7 million, $553.0 million and $237.5 million, respectively. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized. The results of these acquisitions have been included in the consolidated financial statements from the date of purchase. Pro forma results of operations have not been presented as the results of the acquired companies were not material, individually or in the aggregate, to our consolidated results of operations for the three or nine months ended September 30, 2012 or 2011.

Acquisition of Nicira

On August 24, 2012, VMware acquired all of the outstanding capital stock of Nicira, a developer of software-defined networking solutions. This acquisition expands VMware’s product portfolio to provide a suite of software-defined networking capabilities.

The aggregate consideration paid for Nicira was $1,099.6 million, net of cash acquired, including cash of $1,083.0 million and the fair value of assumed equity attributed to pre-combination services of $16.6 million. Additionally, VMware assumed all of Nicira’s unvested stock options and restricted stock outstanding. These converted into 1.1 million stock options to purchase VMware Class A common stock. The assumed restricted stock converted into 0.6 million shares of restricted VMware Class A common stock.

The weighted-average acquisition-date fair value of the stock options was determined using the Black-Scholes option pricing model with the following weighted-average assumptions: (i) market price of $92.21 per share, which was the closing price of VMware’s Class A common stock on the acquisition date; (ii) expected term of 2.7 years; (iii) risk-free interest rate of 0.3%; (iv) annualized volatility of 35.7%; and (v) no dividend yield. The assumed restricted stock converted into 0.6 million shares of restricted VMware Class A common stock. The fair value of the restricted stock was based on the acquisition-date closing price of $92.21 per share for VMware’s Class A common stock.

The purchase price has been allocated to the assets acquired and the liabilities assumed based on estimated fair values as of the acquisition date. The following table summarizes the allocation of the Nicira purchase price (table in thousands):

Intangible assets:
Purchased technology (weighted-average useful life of 7 years)	$	266,000
Trademarks and tradenames (weighted-average useful life of 10 years)	20,100
In-process research and development	48,500
Total intangible assets	334,600
Goodwill	947,956
Deferred tax liabilities, net	(78,247		)
Income tax payable	(103,822		)
Other current liabilities, net of current assets	(863		)
Total purchase price	$	1,099,624

In connection with the Nicira acquisition, we acquired one in-process research and development (“IPR&D”) project which is expected to be completed by the end of 2012. The value assigned to the IPR&D project was determined using a discounted cash flow model with a discount rate of 17.0%. Upon completion, the project will be amortized over its projected remaining useful life. The estimated costs to complete the project are not material.

Intangible Assets

Intangible assets, excluding goodwill, as of September 30, 2012 and December 31, 2011 consist of (tables in thousands):

	September 30, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	$	2,085,323	$	(1,153,712	)	$	931,611
Patents	225,146		(83,235		)	141,911
Software licenses	94,495		(87,456		)	7,039
Trademarks and tradenames	194,891		(107,397		)	87,494
Customer relationships and customer lists	1,372,665		(700,069		)	672,596
In-process research and development	71,700		—			71,700
Leasehold interest	146,757		(5,769		)	140,988
Other	25,822		(25,801		)	21
Total intangible assets, excluding goodwill	$	4,216,799	$	(2,163,439	)	$	2,053,360

	December 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	$	1,620,977	$	(1,020,356	)	$	600,621
Patents	225,146		(72,078		)	153,068
Software licenses	90,093		(83,999		)	6,094
Trademarks and tradenames	172,851		(93,636		)	79,215
Customer relationships and customer lists	1,329,775		(597,117		)	732,658
In-process research and development	43,900		—			43,900
Leasehold interest	146,757		(2,524		)	144,233
Other	30,149		(23,823		)	6,326
Total intangible assets, excluding goodwill	$	3,659,648	$	(1,893,533	)	$	1,766,115

Goodwill

Changes in the carrying amount of goodwill, net, on a consolidated basis and by segment, for the nine months ended September 30, 2012 and the year ended December 31, 2011 consist of (tables in thousands):

	Nine Months Ended September 30, 2012
	Information Storage			Information Intelligence Group		RSA Information Security			VMware Virtual Infrastructure			Total
Balance, beginning of the period	$	7,033,965		$	1,469,216	$	1,849,116		$	1,802,673		$	12,154,970
Goodwill resulting from acquisitions	427,553			14,493		3,751			1,137,914			1,583,711
Tax deduction from exercise of stock options	(6		)	—		—			—			(6		)
Finalization of purchase price allocations	(659		)	—		(6,099		)	(3,661		)	(10,419		)
Balance, end of the period	$	7,460,853		$	1,483,709	$	1,846,768		$	2,936,926		$	13,728,256

	Year Ended December 31, 2011
	Information Storage			Information Intelligence Group			RSA Information Security			VMware Virtual Infrastructure		Total
Balance, beginning of the year	$	7,029,341		$	1,467,903		$	1,663,213		$	1,612,193	$	11,772,650
Goodwill resulting from acquisitions	—			—			187,445			188,395		375,840
Tax deduction from exercise of stock options	(73		)	(852		)	(95		)	—		(1,020		)
Finalization of purchase price allocations	4,697			2,165			(1,447		)	2,085		7,500
Balance, end of the year	$	7,033,965		$	1,469,216		$	1,849,116		$	1,802,673	$	12,154,970