Business Combinations

9 Months Ended

Sep. 30, 2011

Business Combinations [Abstract]

Business Combinations

3. Business Combinations

     In May 2011, we completed our acquisition of SC Square Ltd., a leading security software developer for $40 million, exclusive of cash acquired. The purchase price was paid in cash, with a portion of the consideration placed into escrow pursuant to the terms of the acquisition agreement.

     In April 2011, we completed our acquisition of Provigent Inc., a privately-held company that provides highly integrated, high performance, mixed signal semiconductors for microwave backhaul systems. In connection with the acquisition, we paid $314 million, exclusive of cash acquired, to acquire all of the outstanding shares of capital stock and other equity rights of Provigent. The purchase price was paid in cash, except that a portion attributable to certain unvested employee stock options was paid in the form of Broadcom equity awards. The equity awards had a fair value of $4 million, of which substantially all will be recognized as stock-based compensation expense over the next three years. A portion of the cash consideration was placed into escrow pursuant to the terms of the acquisition agreement.

     Our primary reasons for these acquisitions were to expand our addressable market in the Mobile & Wireless and Infrastructure & Networking markets, reduce the time required to develop new technologies and products and bring them to market, incorporate enhanced functionality into and complement our existing product offerings, augment our engineering workforce, and enhance our technological capabilities.

     We allocated the purchase price of these acquisitions to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill. The principal factor that resulted in recognition of goodwill was that the purchase price for the acquisitions was based in part on cash flow projections assuming the integration of any acquired technology and products with our products, which is of considerably greater value than utilizing the acquired company’s technology or product on a standalone basis. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of acquisition. Intangible assets are amortized using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used or, if that pattern cannot be reliably determined, using a straight-line amortization method.

     For these acquisitions the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. Based upon those calculations, the purchase prices for the acquisitions were allocated as follows:

	2011
	Acquisitions
	(In millions)
Fair Market Values
Cash and cash equivalents	$	10
Short-term marketable securities		1
Accounts receivable, net		12
Inventory		30
Prepaid and other current assets		4
Property and equipment, net		3
Goodwill		134
Purchased intangible assets		233
Total assets acquired		427
Accounts payable		7
Wages and related benefits		4
Accrued liabilities		2
Long-term liabilities		57
Total liabilities assumed		70
Purchase price allocation	$	357

	Useful	2011
	Life	Acquisitions
	(In years)	(In millions)
Purchased Intangible Assets:
Developed technology	4 - 13	$	148
In-process research and development	8 - 10		45
Customer relationships	3 - 8		37
Other	1 - 10		3
		$	233

Purchased Intangible Assets

     Developed technology represents patented technology and completed technology. Patented technology is the fundamental technology that survives multiple product iterations, while completed technology is specific to certain products acquired: both of these technologies have passed technological feasibility. We generally use a relief-from-royalty method to value patented technology, based on market royalties for similar fundamental technologies. The relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the patented technology. The market-derived royalty rate is then applied to estimate the royalty savings. To value completed technology, we generally use a multi-period excess earnings approach which calculates the value based on the risk-adjusted present value of the cash flows specific to the products, allowing for a reasonable return.

     The fair value of the IPR&D for our acquisitions was determined using the income approach. Under the income approach, the expected future cash flows from each project under development are estimated and discounted to their net present values at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted average cost of capital, the return on assets, as well as the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on patented technology, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration and growth rates.

     Customer relationships represent the fair value of future projected revenue that will be derived from the sale of products to existing customers of the acquired companies.

In-Process Research and Development

     We capitalized $45 million of IPR&D costs in 2011 related to our Provigent acquisition. Upon completion of each project, the related IPR&D assets will be reclassified to developed technology and subsequently amortized over their estimated useful lives. If any of the projects are abandoned, we will be required to impair the related IPR&D asset.

     We believe the amounts recorded as IPR&D, as well as developed technology, represented the fair values and approximate the amounts a market participant would pay for these projects as of the respective acquisition dates.

     The following table summarizes the significant assumptions underlying the valuations of IPR&D at the acquisition date for our Provigent acquisition completed in 2011:

Weighted

Average

Average

Risk

Estimated

Estimated

Estimated

Adjusted

Percent

Time to

Cost to

Discount

Company Acquired

Development Projects

Complete

Complete

Complete

Rate

IPR&D

(In years)

(In millions)

(In millions)

Provigent, Inc.

Microwave

41

%

2.1

$

74

21.0

%

$

45

     The assumptions consist primarily of expected completion dates for the IPR&D projects, estimated costs to complete the projects, and revenue and expense projections for the products once they have entered the market. Research and development costs to bring the products of the acquired companies to technological feasibility are not expected to have a material impact on our results of operations or financial condition. At September 30, 2011 all development projects from our Provigent acquisition were still in process.

Contingent Consideration

     In connection with certain of our acquisitions, additional cash consideration of up to $20 million may be paid to former shareholders upon satisfaction of certain future performance goals. In connection with this contingent consideration, we originally recorded an estimated $1 million liability. As of September 30, 2011, there have been no changes to our original estimates.

Supplemental Pro Forma Data (Unaudited)

     The unaudited pro forma statement of income data below gives effect to our 2011 and 2010 acquisitions as if they had occurred at the beginning of the year prior to their respective acquisition dates. The following data includes the amortization of purchased intangible assets and acquired inventory valuation step-up, and stock-based compensation expense. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisitions taken place in the periods noted above.

	Nine Months Ended
	September 30,
	2011		2010
	(In millions, except per share data)
Pro forma net revenue	$	5,592	$	4,987
Pro forma net income	$	653	$	745
Pro forma net income per share (basic)	$	1.21	$	1.48
Pro forma net income per share (diluted)	$	1.16	$	1.39

Pending Acquisition

     In September 2011 we signed a definitive agreement to acquire NetLogic Microsystems, Inc., or NetLogic, a publicly traded company that is a leader in high performance intelligent semiconductor solutions for next generation networks. The expected purchase consideration is approximately $3.7 billion, net of cash assumed, based on the shares outstanding on September 11, 2011.

     Under the agreement, each issued and outstanding share of NetLogic common stock (other than (i) shares held by Broadcom, NetLogic or any of their respective wholly owned subsidiaries and (ii) shares held by NetLogic stockholders who perfect their appraisal rights) will be converted into the right to receive $50.00 in cash. The agreement further provides for, subject to certain limited exceptions, (i) the assumption of all in-the-money options to acquire NetLogic common stock outstanding immediately prior to the effective time of the Merger held by employees, (ii) the cash-out of all in-the-money stock options held by non-employees, (iii) the conversion of all unvested restricted stock units held by NetLogic employees into Broadcom restricted stock units and (iv) the cash-out of all unvested restricted stock units held by persons other than NetLogic employees.

     The transaction has been approved by the Broadcom and NetLogic boards of directors and is subject to customary closing conditions, including the receipt of regulatory clearances and the approval of NetLogic’s stockholders. There are no financing contingencies related to the acquisition. The transaction is expected to close in the first half of 2012.