Business Combinations, Intangibles and Goodwill

Acquisition of AirWatch

On February 24, 2014, VMware acquired all of the outstanding capital stock of A.W.S. Holding, LLC ("AirWatch Holding"), the sole member and equity holder of AirWatch LLC ("AirWatch"). AirWatch is a leader in enterprise mobile management and security solutions. VMware acquired AirWatch to expand its solutions within the enterprise mobile and security space. The aggregate consideration paid for AirWatch was $1,092 million, net of cash acquired, including cash of $1,068 million and the fair value of assumed unvested equity attributed to pre-combination services totaling $24 million.

Merger consideration totaling $300 million was payable to certain employees of AirWatch subject to specified future employment conditions and will be recognized as expense over the requisite service period. Compensation expense totaling $101 million was recognized from the date of acquisition through September 30, 2014.

The following table summarizes the allocation of the consideration to the fair value of the assets acquired and net liabilities assumed, net of cash acquired (table in millions):



Other current assets	$	60
Intangible assets:
Purchased technology (weighted-average useful life of 6 years)	118
Customer relationships and customer lists (weighted-average useful life of 8 years)	78
Trademarks and tradenames (weighted-average useful life of 8 years)	40
Other (weighted-average useful life of 3 years)	14
Total intangible assets, net, excluding goodwill	250
Goodwill	879
Other assets	17
Total assets acquired	1,206
Unearned revenue	(45		)
Other assumed liabilities, net of acquired assets	(69		)
Total net liabilities assumed	(114		)
Fair value of assets acquired and net liabilities assumed	$	1,092

These VMware intangible assets are being amortized on a straight-line basis. Goodwill is calculated as the excess of the consideration over the fair value of the net assets, including intangible assets, recognized and primarily related to expected synergies from the transaction. The majority of the goodwill and identifiable intangible assets are expected to be deductible for U.S. federal income tax purposes. The results of this acquisition 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 company were not material to our consolidated results of operations for the three and nine months ended September 30, 2014 or 2013.

Other Acquisitions

During the nine months ended September 30, 2014, EMC acquired three companies. We acquired all of the outstanding capital stock of DSSD, Inc., a developer of an innovative new rack-scale flash storage architecture for I/O-intensive in-memory databases and Big Data workloads, and TwinStrata, Inc., a provider of advanced tiering cloud technology. These acquisitions complement and expand our Information Storage segment. We also acquired Symplified, Inc., a provider of a comprehensive cloud identity solution that helps service-oriented IT organizations simplify user access, regain visibility and control over application usage and meet security and compliance requirements, which complements and expands our RSA Information Security segment.

Additionally, during the nine months ended September 30, 2014, VMware acquired all of the outstanding common stock of CloudVolumes, Inc., a provider of real-time application delivery technology that enables enterprises to deliver native applications to virtualized environments on-demand.

The aggregate consideration for these four acquisitions was $800 million, which consisted of $735 million of cash consideration, net of cash acquired, $9 million for the fair value of assumed unvested equity attributed to pre-combination services and $11 million in contingent consideration attributed to pre-combination services which is included in accrued expenses on the consolidated balance sheets. In connection with these acquisitions, we had a $45 million gain on previously held interests in strategic investments. This was recognized in other expense, net in the consolidated income statements in the second quarter of 2014. The consideration 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 $563 million, $325 million and $88 million, respectively.

The intangible assets acquired were comprised of developed technology and software license intangible assets which have a weighted-average amortization period of 7 years. Most of our intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized; the remainder are amortized on a straight-line basis. Goodwill is calculated as the excess of the consideration over the fair value of the net assets, including intangible assets, and is primarily related to expected synergies from the transaction. The goodwill is not deductible for U.S. federal income tax purposes. 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 to our consolidated results of operations for the three and nine months ended September 30, 2014 or 2013.

Intangible Assets

Intangible assets, excluding goodwill, as of September 30, 2014 and December 31, 2013 consist of (tables in millions):



	September 30, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	$	2,807	$	(1,607	)	$	1,200
Patents	225		(113		)	112
Software licenses	105		(92		)	13
Trademarks and tradenames	212		(131		)	81
Customer relationships and customer lists	1,463		(944		)	519
Leasehold interest	147		(15		)	132
Other	44		(32		)	12
Total intangible assets, excluding goodwill	$	5,003	$	(2,934	)	$	2,069



	December 31, 2013
	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	$	2,356	$	(1,429	)	$	927
Patents	225		(102		)	123
Software licenses	101		(90		)	11
Trademarks and tradenames	171		(118		)	53
Customer relationships and customer lists	1,386		(855		)	531
Leasehold interest	145		(11		)	134
Other	28		(27		)	1
Total intangible assets, excluding goodwill	$	4,412	$	(2,632	)	$	1,780

Goodwill

Changes in the carrying amount of goodwill, net, on a consolidated basis and by segment, for the nine months ended September 30, 2014 consist of (table in millions):



	Nine Months Ended September 30, 2014
	Information Storage		Information Intelligence Group			RSA Information Security		Pivotal			VMware Virtual Infrastructure			Total
Balance, beginning of the period	$	7,486	$	1,487		$	2,203	$	177		$	3,071		$	14,424
Goodwill resulting from acquisitions	526		—			—		—			916			1,442
Finalization of purchase price allocations and other, net	2		(1		)	—		—			(8		)	(7		)
Goodwill transferred in acquisition of Pivotal businesses	6		—			—		(6		)	—			—
Balance, end of the period	$	8,020	$	1,486		$	2,203	$	171		$	3,979		$	15,859

During the first quarter of 2014, the Information Storage segment acquired the Data Computing Appliance and implementation services businesses from the Pivotal segment. The transfer of goodwill pursuant to this acquisition is shown above for the nine months ended September 30, 2014. For both transactions, the amount of transferred goodwill was determined using the relative fair value method. See Note 15 for further discussion of the segment reclassifications.