Business Combination

9 Months Ended

Nov. 01, 2020

In October 2020, we acquired all outstanding stock of Portworx Inc. (Portworx), a privately-held container storage company that provides a Kubernetes data services platform for cloud native applications based in Los Altos, California. The transaction costs associated with the acquisition were not material and expensed as incurred. The total purchase consideration for the acquisition of Portworx was $353.0 million, which consisted of the following (in thousands):


Cash	$	344,213
Fair value of stock options assumed	8,802
Total	$	353,015

We assumed certain unvested and outstanding stock options for Portworx's common stock. These stock options were converted into stock options for shares of our common stock. The fair value of the exchanged options determined using the Black-Scholes option pricing model was $26.8 million, of which $8.8 million attributable to services performed prior to the acquisition date was allocated to purchase consideration. The remaining fair value of $18.0 million was allocated to future services and will be expensed over the remaining service periods as stock-based compensation expense. In addition, we assumed restricted stock units (RSUs) outstanding under the 2020 Portworx Equity Incentive Plan with a fair value of $31.8 million that is being recognized as stock-based compensation expense over a four year vesting period.

The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of the acquisition (in thousands):


	Amount		Estimated Useful Life
Goodwill	$	323,413
Identified intangible assets:
Developed technology	21,612		5 years
Customer relationships	6,116		7 years
Trade name	3,762		3 years
Cash	4,407
Net liabilities assumed	(6,295)
Total	$	353,015

Goodwill generated from this acquisition is primarily attributable to the assembled workforce and expected post-acquisition synergies from combining Portworx container data services with our data services platform to expand our capabilities to support Kubernetes and containers. Goodwill is not deductible for tax purposes. The preliminary fair values of developed technology, customer relationships and trade name were estimated by applying the excess earnings method, with-and-without method, and the relief-from-royalty method, respectively, all of which are under the income approach whose underlying inputs are considered Level 3. The preliminary calculations and valuations of fair values assigned to assets acquired and liabilities assumed are based on management's estimates and assumptions which may be subject to change as we obtain additional information. The areas that remain preliminary relate to the fair values of the identified intangible assets acquired and deferred revenue assumed. We expect to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

In addition, cash payments to certain former shareholders of Portworx totaling $32.2 million are being made over three years subject to continuous employment and are recognized as an operating expense. Of this amount, $11.9 million was deposited in escrow at the acquisition date and recorded as a deferred compensation asset that is included within other assets, non-current in the condensed consolidated balance sheets.

The results of Portworx have been included in our condensed consolidated statements of operations since the acquisition date and are not material. Pro forma results of operations have not been presented because the acquisition is not material to our results of operations.