Acquisitions

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 at the completion of the acquisition. The assumed unvested stock options 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 expected volatility of 35.7%; and (v) no dividend yield. 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, adjusted in the fourth quarter of 2012 for a reassessment of unrecognized tax benefit (table in thousands):



Intangible assets:
Purchased technology (weighted-average useful life of 7.0 years)	$	266,000
Trademarks and tradenames (weighted-average useful life of 10.0 years)	20,100
In-process research and development	48,500
Total intangible assets	334,600
Goodwill	905,140
Deferred tax liabilities, net	(78,247		)
Income tax payable	(61,006		)
Other acquired liabilities, net of acquired assets	(863		)
Total purchase price	$	1,099,624

In-process Research and Development

In connection with the Nicira acquisition, we acquired one in-process research and development (“IPR&D”) project which was completed by the end of 2012 and will be amortized over its estimated useful life of 8.0 years.

Other 2012 Acquisitions

During the year ended December 31, 2012, EMC acquired eleven 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; Tiburon Technologies, a provider of support and modernization services for legacy database management systems; and iWave Software, a provider of storage and cloud automation software solutions. 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 and Trinity Technologies, a provider of enterprise content management consulting and development services which complement and expand our Information Intelligence Group segment. We acquired Silicium Security, a provider of enterprise malware detection solutions, More VRP Resources, a provider of database performance and monitoring software and Silver Tail Systems, a provider of web fraud detection and security software which complement and expand our RSA Information Security segment. Additionally, during the twelve months ended December 31, 2012, VMware acquired five companies, excluding the acquisition of Nicira, which were not material in the aggregate. 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), net in the second quarter of 2012.

The aggregate consideration for these sixteen acquisitions, excluding Nicira, was $1,059.7 million which consisted of $1,052.8 million of cash consideration, net of cash acquired and $6.9 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 $818.9 million, $311.4 million and $70.6 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 years ended December 31, 2012, 2011 and 2010.

The fair value of our stock options for all of the aforementioned acquisitions, excluding Nicira, in 2012 was estimated assuming no expected dividends and the following weighted-average assumptions:



Expected term (in years)	1.9
Expected volatility	31.6	%
Risk-free interest rate	0.3	%

The following represents the aggregate allocation of the purchase price for all of the aforementioned acquisitions, excluding Nicira, to intangible assets (table in thousands):



Developed technology (weighted-average useful life of 4.8 years)	$	254,557
Customer relationships (weighted-average useful life of 6.1 years)	54,713
Tradename and trademark (weighted-average useful life of 3.4 years)	2,170
Total intangible assets	$	311,440

The total weighted-average amortization period for the intangible assets is 5.0 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.

2011 Acquisitions

During the year ended December 31, 2011, we acquired all of the capital stock of NetWitness Corporation, a privately-held provider of network security analysis solutions. This acquisition complemented and expanded our RSA Information Security segment. Additionally, during the year ended December 31, 2011, VMware acquired six companies. The aggregate consideration for these seven acquisitions was $539.8 million which consisted of $536.6 million of cash consideration, net of cash acquired and $3.2 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 allocation to goodwill, intangibles and net assets was approximately $375.8 million, $157.1 million and $6.9 million, respectively. The results of these acquisitions have been included in the consolidated financial statements from the respective dates of purchase.

The following represents the aggregate allocation of the purchase price for all the aforementioned acquisitions to intangible assets (table in thousands):



Developed technology (weighted-average useful life of 3.2 years)	$	97,500
Customer relationships (weighted-average useful life of 4.0 years)	58,400
Tradename and trademark (weighted-average useful life of 2.6 years)	1,200
Total intangible assets	$	157,100

The total weighted-average amortization period for the intangible assets is 3.5 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.

2010 Acquisitions

Acquisition of Isilon Systems, Inc.

In the fourth quarter of 2010, we acquired all of the outstanding capital stock of Isilon Systems, Inc. (“Isilon”), a “scale-out NAS” (network attached storage) systems company. This acquisition further complemented and expanded our Information Storage business.

The purchase price for Isilon, net of cash and investments, was $2,327.9 million, which consisted of $2,301.1 million of cash consideration and $26.8 million for the fair value of our stock options granted in exchange for existing Isilon options. We incurred $0.6 million of transaction costs for legal and accounting services, which are included in restructuring and acquisition-related charges in our consolidated income statement. The fair value of our stock options issued to employees of Isilon was estimated using a Black-Scholes option pricing model.

The purchase price was allocated to the assets acquired and the liabilities assumed based on estimated fair values as of the acquisition date.

The following represents the allocation of the Isilon purchase price (table in thousands):



Trade accounts receivable (approximates contractual value)	$	38,565
Other current assets	17,448
Property and equipment	8,678
Intangible assets:
Developed technology (weighted-average useful life of 3.1 years)	115,300
Customer maintenance relationships (weighted-average useful life of 6.6 years)	142,900
Customer product relationships (weighted-average useful life of 4.3 years)	159,600
Tradename (weighted-average useful life of 2.4 years)	7,700
IPR&D	43,900
Total intangible assets	469,400
Goodwill	1,974,536
Current liabilities	(51,910		)
Income tax payable	(272		)
Deferred revenue	(37,800		)
Deferred income taxes	(90,758		)
Total purchase price	$	2,327,887

The total weighted-average amortization period for the intangible assets is 4.6 years. The intangible assets are being amortized over the pattern in which the economic benefits of the intangible assets are being utilized, which in general reflects the cash flows generated from such assets. The goodwill associated with this acquisition is reported within our Information Storage segment. None of the goodwill is deductible for tax purposes. The goodwill results from expected synergies from the transaction, including complementary products that will enhance our overall product portfolio, which we believe will result in incremental revenue and profitability.

In-process Research and Development

In connection with the Isilon acquisition in 2010, we acquired and capitalized $43.9 million of IPR&D projects. All projects acquired in 2010 were completed in 2012 and are being amortized over their projected remaining useful lives.

Other 2010 Acquisitions

During the year ended December 31, 2010, we acquired three companies, excluding Isilon. We acquired all of the outstanding capital stock of Archer Technologies, LLC, a provider of governance, risk and compliance software. This acquisition complemented and expanded our RSA Information Security segment. We acquired all of the outstanding capital stock of Greenplum, Inc., a provider of disruptive data warehousing technology and Bus-tech, Inc., a provider of information infrastructure solutions. These acquisitions complemented and expanded our Information Storage segment. Additionally, during the year ended December 31, 2010, VMware acquired six companies. The aggregate purchase price, net of cash acquired for all 2010 acquisitions, excluding Isilon, was $895.5 million, which consisted of $893.5 million of cash and $1.9 million in fair value of our stock options issued in exchange for the acquirees’ stock options and resulted in goodwill of $631.4 million. The results of these acquisitions have been included in the consolidated financial statements from the date of purchase.

The fair value of our stock options for all acquisitions, including Isilon, in 2010 was estimated assuming no expected dividends and the following weighted-average assumptions:



Expected term (in years)	2.0
Expected volatility	29.0	%
Risk-free interest rate	0.7	%

The following represents the aggregate allocation of the purchase price for all the aforementioned acquisitions, excluding Isilon, to intangible assets (table in thousands):



Developed technology (weighted-average useful life of 4.7 years)	$	158,860
Customer relationships (weighted-average useful life of 6.4 years)	74,280
Tradename and trademark (weighted-average useful life of 2.5 years)	12,620
Other (weighted-average useful life of 2.1 years)	3,379
Total intangible assets	$	249,139

The total weighted-average amortization period for the intangible assets is 4.6 years. The intangible assets are being amortized over the pattern in which the economic benefits of the intangible assets are being utilized. The total goodwill recognized from the aforementioned acquisitions, including Isilon, was $2,605.9 million.