Business Combinations

9 Months Ended

Sep. 30, 2012

Business Combinations [Abstract]

Business Combinations

Business Combinations

On February 17, 2012 we completed our acquisition of NetLogic, a publicly traded company that was a provider of high performance intelligent semiconductor solutions for next generation networks. Our primary reasons for acquiring NetLogic were to enhance our ability to deliver a complete, end-to-end network infrastructure solution for customers and to reduce both time-to-market and development costs. The addition of NetLogic also extends Broadcom’s infrastructure portfolio with key technologies, including multi-core embedded processor and knowledge-based processor solutions, both critical enablers of the next generation infrastructure build-out. In April 2012 we completed our acquisition of BroadLight, a provider of networking and fiber access Passive Optical Network, or PON, processors. Our primary reason for acquiring BroadLight was to extend Broadcom’s broadband access product line, enabling Broadcom to offer a complete, end-to-end PON solution for customers — from the optical line terminal at the central office to the optical network unit at the home. BroadLight also extends Broadcom’s broadband access roadmap to support customer requirements for rolling out next-generation fiber networks worldwide. In addition, these acquisitions allowed us to enter into or expand our market share in the relevant wired and wireless communications market segments, 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.

The following table presents details of the purchase consideration related to each acquisition:

Company Acquired	Month Acquired	Business	Cash Consideration Paid		Cash Assumed		Equity Consideration Paid		Assumed Contingent Consideration		Contingent Consideration Maximum		Contingent Consideration Fair Value
							(In millions)
2012 Acquisitions
BroadLight, Inc.	April 2012	PON processors	$	200	$	22	$	3	$	—	$	10	$	—
NetLogic Microsystems, Inc.	February 2012	Next generation networks	3,612		219		349		53		110		53
Other	NA	NA	11		—		—		—		—		—
			$	3,823	$	241	$	352	$	53	$	120	$	53

The purchase price of the NetLogic acquisition was paid in cash, except for certain equity awards with a fair value of $349 million that were assumed. Approximately $137 million of the equity consideration was recorded as goodwill and $212 million will be recognized as stock-based compensation expense primarily over the next two to three years. A portion of the cash consideration in the BroadLight acquisition is currently held in escrow pursuant to the terms of the acquisition agreement and is reflected in goodwill as we believe the likelihood of the escrow fund being utilized by us is remote.

In connection with these acquisitions, our results of operations in the three months ended September 30, 2012 included: (i) stock-based compensation of $25 million, (ii) the amortization of purchased intangibles of $63 million, and (iii) the amortization of acquired inventory valuation step-up of $5 million. In connection with these acquisitions, our results of operations in the nine months ended September 30, 2012 included: (i) stock-based compensation of $77 million, of which $17 million related to the accelerated vesting of equity awards upon the termination of certain employees with change in control agreements, (ii) the amortization of purchased intangibles of $156 million, and (iii) the amortization of acquired inventory valuation step-up of $68 million. We also incurred certain severance and other benefit costs of $3 million in the nine months ended September 30, 2012 that are classified as restructuring costs in our unaudited condensed consolidated statement of income. Lastly, we incurred $6 million in transaction costs related to legal, accounting and other related fees, of which $1 million was recorded in the nine months ended September 30, 2012 in selling, general and administrative expense and the remaining was previously expensed in 2011.

We have estimated the fair value of the acquired assets and liabilities of BroadLight. We allocated the respective purchase prices to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated respective fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill, of which $23 million is deductible for tax purposes. The principal factor that resulted in recognition of goodwill was that the purchase price for each acquisition was based on cash flow projections assuming the integration of any acquired technology and products with our products, which is of considerably greater value than utilizing each 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 the acquisitions.

Based upon those calculations, the purchase prices for the acquisitions were allocated as follows:

	2012
	Acquisitions
	(In millions)
Fair Market Values
Cash and cash equivalents	$	241
Short-term marketable securities	48
Accounts receivable, net	46
Inventory	101
Prepaid and other current assets	19
Property and equipment, net	17
Other assets	29
Purchased intangible assets	1,782
Goodwill	1,930
Total assets acquired	4,213
Accounts payable	47
Accrued liabilities	42
Net deferred tax liabilities	67
Contingent consideration	53
Long-term liabilities	44
Total liabilities assumed	253
Purchase price allocation	$	3,960

	Useful Life	2012
		Acquisitions
	(In years)	(In millions)
Purchased Intangible Assets:
Developed technology	1 - 14	$	1,288
In-process research and development	10 - 13	267
Customer relationships	1 - 5	212
Other	1 - 8	15
		$	1,782

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 or market transactions to value patented technology, based on market royalties or prices 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 from 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. We believe the amount recorded as IPR&D, as well as developed technology, represented the fair value and approximate the amount a market participant would pay for these projects as of the acquisition date.

The following table summarizes the significant assumptions underlying the valuation of IPR&D at the date of acquisition:

Company Acquired	Development Projects	Weighted Average Estimated Percent Complete		Average Estimated Time to Complete	Estimated Cost to Complete		Risk Adjusted Discount Rate		IPR&D
				(In years)	(In millions)				(In millions)
NetLogic	Next generation networks	10	%	4.3	$	401	17	%	$	267

There was no IPR&D related to our other acquisitions. 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. Actual results to date have been consistent, in all material respects, with our assumptions at the time of the acquisitions.

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.

Contingent Earn-out Consideration

In connection with our NetLogic acquisition, we assumed a liability of $53 million related to contingent consideration in connection with one of NetLogic’s prior acquisitions and subsequently paid this amount in the nine months ended September 30, 2012. Additional cash consideration of up to $57 million may be paid to the former shareholders of this prior acquisition upon satisfaction of certain future performance goals. Additional contingent earn-out consideration of up to $10 million in cash may be paid to the former holders of BroadLight capital stock and other rights upon satisfaction of certain future performance goals. As of September 30, 2012 we do not have any liabilities recorded in connection with any remaining contingent earn-out consideration, as we believe that the achievement of the future performance goals is unlikely.

Supplemental Pro Forma Data (Unaudited)

The unaudited pro forma statement of income data below gives effect to our 2012 and 2011 acquisitions as if they had occurred at the beginning of the year prior to their respective acquisition dates. The following data includes the effects of amortization of purchased intangible assets and acquired inventory valuation step-up, stock-based compensation expense, foregone interest as a result of cash paid to acquire the companies, and other one-time transactions costs directly associated with the acquisitions such as legal, accounting and banking fees. 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,
	2012		2011
	(In millions, except per share data)
Pro forma net revenue	$	5,995	$	5,940
Pro forma net income	$	579	$	430
Pro forma net income per share (basic)	$	1.04	$	0.80
Pro forma net income per share (diluted)	$	1.00	$	0.76