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Acquisitions
 12 Months Ended
Dec. 31, 2011
Acquisitions

C.       Acquisitions

 

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 complements and expands 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. 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 years ended December 31, 2011, 2010 and 2009.

 

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.

 

Other 2010 Acquisitions

 

In the first quarter of 2010, 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. In the third quarter of 2010, we acquired all of the outstanding capital stock of Greenplum, Inc., a provider of disruptive data warehousing technology. This acquisition complemented and expanded our Information Storage segment. In the fourth quarter of 2010, we acquired all of the capital stock of Bus-tech, Inc., a provider of information infrastructure solutions. This acquisition 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 $895.4 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.

 

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 are expected to be completed in 2012.

 

The value assigned to the IPR&D projects was determined utilizing the income approach by determining cash flow projections relating to the projects. The stage of completion of each in-process project was estimated to determine the discount rates to be applied to the valuation of the in-process technology. Based upon the level of completion and the risk associated with the in-process technology, we applied discount rates ranging from 19% to 22% to value the IPR&D projects acquired in 2010. Under new business combination guidance effective in 2009, each IPR&D project is capitalized and will be assessed for impairment until completed. Upon completion, the project will be amortized over its estimated useful life over the pattern in which the economic benefits of the intangible assets are being utilized. Based on our annual assessment there was no impairment at December 31, 2011.

       

2009 Acquisitions

 

Acquisition of Data Domain, Inc.

       

In the third quarter of 2009, we acquired all of the outstanding capital stock of Data Domain, Inc. (“Data Domain”), a provider of storage solutions for backup and archive applications based on deduplication technology. This acquisition complemented and expanded our Information Storage business. The purchase price for Data Domain, net of cash and investments, was $2,017.3 million, which consisted of $1,933.9 million of cash consideration and $83.4 million for the fair value of our stock options granted in exchange for existing Data Domain options. We incurred $12.0 million of transaction costs for financial advisory, legal and accounting services, which are included in restructuring and acquisition-related charges in our consolidated income statements. The fair value of our stock options issued to employees of Data Domain was estimated using a Black-Scholes option pricing model.

 

The consolidated financial statements include the results of Data Domain from the date of acquisition. 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 represents the allocation of the Data Domain purchase price (table in thousands):

 

 Trade accounts receivable (approximates contractual value)$72,455
 Other current assets 9,275
 Property and equipment 40,403
 Intangible assets:  
  Developed technology (weighted-average useful life of 2.6 years) 106,300
  Customer maintenance relationships (weighted-average useful life of 5.8 years) 133,700
  Customer product relationships (weighted-average useful life of 4.2 years) 111,500
  Tradename (weighted-average useful life of 2.0 years) 6,400
  IPR&D 174,600
  Total intangible assets 532,500
 Other long-term assets 60
 Goodwill 1,658,321
 Current liabilities (67,212)
 Income tax payable (4,671)
 Deferred revenue (60,800)
 Deferred income taxes (152,818)
 Long-term liabilities (10,243)
  Total purchase price$2,017,270

The total weighted-average amortization period for the intangible assets is 4.3 years. The intangible assets are being amortized over the pattern in which the economic benefits of the intangible assets are being utilized. 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.

 

Other 2009 Acquisitions

 

In the second quarter of 2009, we acquired all of the outstanding capital stock of Configuresoft, Inc. (“Configuresoft”), a provider of server configuration, change and compliance management software. The acquisition complemented and expanded our server configuration management solutions within the Information Storage segment. In the third quarter of 2009, we acquired all of the capital stock of FastScale Technology, Inc., a provider of software platforms and solutions that optimize deployments for physical, virtual and cloud infrastructures. This acquisition complemented and expanded our Information Storage segment. In the third quarter of 2009, we acquired all of the capital stock of Kazeon Systems, Inc., a provider of eDiscovery products and solutions which allow corporations, legal service providers and law firms to efficiently search, classify and analyze the growing volumes of information dispersed through their networks. This acquisition complemented and expanded our Information Intelligence Group segment. VMware acquired the remaining outstanding capital stock of SpringSource Global, Inc. (“SpringSource”), a leader in enterprise and web application development and management. Through the acquisition of SpringSource, VMware planned to deliver new solutions that enable companies to more efficiently build, run and manage applications within both internal and external cloud architectures that can host both existing and new applications. The purchase price for SpringSource, net of cash acquired, was approximately $372.5 million, which consisted of $356.3 million of cash consideration and $16.2 million for the fair value of VMware stock options granted in exchange for existing SpringSource options.

 

In connection with our acquisitions, we had adjustments to the fair value of previously held interests in Data Domain and SpringSource of $25.8 million which were recognized in other income.

 

The aggregate purchase price, net of cash acquired for all 2009 acquisitions, excluding Data Domain, was $730.6 million, which consisted of $730.2 million of cash and $0.4 million in fair value of our stock options issued in exchange for the acquirees' stock options.

 

The total goodwill recognized from the aforementioned acquisitions, including Data Domain, was $2,189.2 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 in 2009 was estimated assuming no expected dividends and the following weighted-average assumptions:

 

 Expected term (in years)2.3 
 Expected volatility37.2%
 Risk-free interest rate1.2%

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 3.5 years)$141,000
 Customer relationships (weighted-average useful life of 6.1 years) 291,800
 Tradename and trademark (weighted-average useful life of 5.6 years) 13,770
 Non-competition agreements (weighted-average useful life of 2.5 years) 1,200
 IPR&D 174,600
  Total intangible assets$622,370

The total weighted-average amortization period for the intangible assets is 4.9 years. The intangible assets are being amortized over the pattern in which the economic benefits of the intangible assets are being utilized.

 

In-process Research and Development

 

In connection with the Configuresoft and Data Domain acquisitions in 2009, we acquired and capitalized $174.6 million of IPR&D projects. All projects acquired in 2009 were completed in 2010. Beginning in 2010, the IPR&D is being amortized over its estimated useful life of five to eight years, over the pattern in which the economic benefits of the intangible assets are being utilized.

 

The value assigned to the IPR&D projects was determined utilizing the income approach by determining cash flow projections relating to the projects. The stage of completion of each in-process project was estimated to determine the discount rates to be applied to the valuation of the in-process technology. Based upon the level of completion and the risk associated with the in-process technology, we applied discount rates ranging from 17% to 21% to the value of projects acquired in 2009.