Quarterly report pursuant to Section 13 or 15(d)

Business Combinations and Asset Acquisitions

v3.22.2.2
Business Combinations and Asset Acquisitions
 3 Months Ended
Sep. 24, 2022
Business Combination and Asset Acquisition [Abstract]  
Business Combination Disclosure Business Combinations
Pensando Acquisition
On May 26, 2022, the Company completed the acquisition of all issued and outstanding shares of Pensando, a leader in next-generation distributed computing, for a transaction valued at approximately $1.9 billion. The recorded purchase consideration of $1.7 billion is net of deferred cash compensation requiring future services and other customary closing adjustments. The acquisition of Pensando and its leading distributed services platform expands the Company’s ability to offer leadership solutions for cloud, enterprise, and edge customers.
The purchase consideration was preliminarily allocated as follows:
(In millions)
Cash and cash equivalents $ 111 
Accounts receivable 31 
Inventory 66 
Prepaid expenses and other current assets 43 
Property and equipment 11 
Deferred tax assets 22 
Acquisition-related intangibles 349 
Total Assets 633 
Accounts payable 15 
Accrued and other liabilities 61 
Total Liabilities 76 
Fair value of net assets acquired 557 
Goodwill 1,098 
Total purchase consideration $ 1,655 
The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the preliminary estimates of their fair values, which were determined using generally accepted valuation techniques based on estimates and assumptions made by management. The fair values are subject to adjustment for up to one year after the close of the transaction as additional information is obtained. Any adjustments to the preliminary purchase price allocation identified during the measurement period are recognized in the period in which the adjustments are determined. Adjustments to the preliminary purchase price allocation since the completion of the acquisition resulted in an immaterial decrease to goodwill.
Goodwill arising from the Pensando acquisition was assigned to the Company’s Data Center segment. Goodwill was primarily attributed to expanded market opportunities expected to be achieved from the integration of Pensando. Goodwill is not expected to be deductible for income tax purposes.
Following are details of the purchase consideration allocated to acquired intangible assets:
Fair Value Weighted-average estimated useful life
(In millions) (In years)
Developed technology (1)
$ 60  4 years
Customer relationships (2)
34  3 years
Customer backlog (3)
16  1 year
Product trademarks (4)
19  5 years
Identified intangible assets subject to amortization 129 
In-process research and development (IPR&D) not subject to amortization (5)
220  N/A
Total identified intangible assets acquired $ 349 
1)The fair value of developed technology was determined using the income approach, specifically the multi-period excess earnings method.
2)Customer relationships represent the fair value of existing contractual relationships and customer loyalty determined based on existing relationships using the income approach, specifically the with and without method.
3)Customer backlog represents the fair value of non-cancellable customer contract orders using the income approach, specifically the multi-period excess earnings method.
4)Product trademarks primarily relate to the Pensando product-related trademarks, and the fair value was determined by applying the income approach, specifically the relief from royalty method.
5)The fair value of IPR&D was determined using the income approach, specifically the multi-period excess earnings method.
The fair value of the identified intangible assets subject to amortization are amortized over the assets’ estimated useful lives based on the pattern in which the economic benefits are expected to be received to cost of sales and operating expenses.
IPR&D consists of projects that have not yet reached technological feasibility as of the acquisition date. Accordingly, the Company recorded an indefinite-lived intangible asset of $220 million for the fair value of these projects, which will initially not be amortized. Instead, these projects will be tested for impairment annually and whenever events or changes in circumstances indicate that these projects may be impaired. Once the project reaches technological feasibility, the Company will begin to amortize the intangible assets over their estimated useful lives.
From the Pensando Acquisition Date to September 24, 2022, the Condensed Consolidated Statements of Operations include immaterial revenue and operating results attributable to Pensando, which are reported under the Data Center segment.
During the three and nine months ended September 24, 2022, Pensando acquisition-related costs of $40 million and $64 million, respectively, were recorded under Cost of sales, Research and development, and Marketing, general and administrative expenses on the Company’s Condensed Consolidated Statements of Operations. Acquisition-related costs are primarily comprised of direct transaction costs, fair value adjustments for acquired inventory and certain compensation charges. The Company may incur additional acquisition-related costs in the future related to the acquisition.
Xilinx Acquisition
On February 14, 2022, the Company completed the acquisition of all issued and outstanding shares of Xilinx, a leading provider of adaptive computing solutions, for a total purchase consideration of $48.8 billion ($46.4 billion, net of cash acquired of $2.4 billion). The acquisition of Xilinx expands the Company’s product portfolio to include adaptable hardware platforms that enable hardware acceleration and rapid innovation across a variety of technologies. With the acquisition of Xilinx, the Company now offers FPGAs, adaptive SoC products and ACAP products. The purchase consideration consisted of $48.5 billion of fair value of 429 million shares of the Company’s common stock issued to Xilinx stockholders and $275 million of fair value of replacement equity awards attributable to services rendered pre-combination. As the transaction closed prior to the opening of markets on the Xilinx Acquisition Date, the fair value of the common stock issued to Xilinx stockholders was based on the closing price of the Company’s common stock on February 11, 2022 of $113.18 per share.
The financial results of Xilinx are included in the Company’s condensed consolidated financial statements from the Xilinx Acquisition Date to September 24, 2022 and are reported under the Embedded and Data Center segments.
The purchase consideration was preliminarily allocated as follows:
(In millions)
Cash and cash equivalents $ 2,366 
Short-term investments 1,582 
Accounts receivable 299 
Inventories 539 
Prepaid expenses and other current assets 61 
Property and equipment 692 
Operating lease right-of-use assets 61 
Acquisition-related intangibles 27,308 
Deferred tax assets 11 
Other non-current assets 418 
Total Assets 33,337 
Accounts payable 116 
Accrued liabilities 633 
Other current liabilities 191 
Long-term debt 1,474 
Long-term operating lease liabilities 45 
Deferred tax liabilities 4,346 
Other long-term liabilities 533 
Total Liabilities 7,338 
Fair value of net assets acquired 25,999 
Goodwill 22,794 
Total purchase consideration $ 48,793 
The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the preliminary estimates of their fair values, which were determined using generally accepted valuation techniques based on estimates and assumptions made by management. The fair values are subject to adjustment for up to one year after the close of the transaction as additional information is obtained. The primary items pending are related to income tax matters. Any adjustments to the preliminary purchase price allocation identified during the measurement period are recognized in the period in which the adjustments are determined.
Goodwill arising from the acquisition of Xilinx was assigned to the Embedded and Data Center segments. Goodwill was primarily attributed to increased synergies expected to be achieved from the integration of Xilinx. Goodwill is not expected to be deductible for income tax purposes.
Following are details of the purchase consideration allocated to acquired intangible assets:
Fair Value Weighted-average estimated useful life
(In millions) (In years)
Developed technology (1)
$ 12,295  16 years
Customer relationships (2)
12,290  14 years
Customer backlog (3)
793  1 year
Corporate trade name (4)
65  1 year
Product trademarks (4)
895  12 years
Identified intangible assets subject to amortization 26,338 
In-process research and development (IPR&D) not subject to amortization (5)
970  N/A
Total identified intangible assets acquired $ 27,308 
(1)The fair value of developed technology was determined using the income approach, specifically, the multi-period excess earnings method.
(2)Customer relationships represent the fair value of existing contractual relationships and customer loyalty determined based on existing relationships using the income approach, specifically the with and without method.
(3)Customer backlog represents the fair value of non-cancellable customer contract orders using the income approach, specifically the multi-period excess earnings method.
(4)Corporate trade name and product trademarks primarily relate to the Xilinx brand and product-related trademarks, respectively, and the fair values were determined by applying the income approach, specifically the relief from royalty method.
(5)The fair value of IPR&D was determined using the income approach, specifically the multi-period excess earnings method.
The fair value of the identified intangible assets subject to amortization are amortized over the assets’ estimated useful lives based on the pattern in which the economic benefits are expected to be received to cost of sales and operating expenses.
IPR&D consists of projects that have not yet reached technological feasibility as of the acquisition date. Accordingly, the Company recorded an indefinite-lived intangible asset of $970 million for the fair value of these projects, which will initially not be amortized. Instead, these projects will be tested for impairment annually and whenever events or changes in circumstances indicate that these projects may be impaired. Once the project reaches technological feasibility, the Company will begin to amortize the intangible assets over their estimated useful life.
The Company also assumed unvested restricted stock units with estimated fair value of $1.2 billion, of which $275 million was included as a component of the purchase consideration and $951 million will be recognized as expense subsequent to the acquisition.
The Condensed Consolidated Statements of Operations include the following revenue and operating income attributable to Xilinx for the three and nine months ended September 24, 2022:
Three Months Ended September 24, 2022 Nine Months Ended
September 24, 2022
(In millions)
Net revenue $ 1,312  $ 3,122 
Operating income $ 644  $ 1,470 
Operating income attributable to Xilinx recorded under the Embedded and Data Center segments does not include amortization of acquisition-related intangibles, employee stock-based compensation expense and acquisition-related costs, which are recorded under the “All Other” segment.
During the three and nine months ended September 24, 2022, Xilinx acquisition-related costs of $11 million and $336 million, respectively, were recorded under Cost of sales, Research and development, and Marketing, general and administrative expenses on the Company’s Condensed Consolidated Statements of Operations. Acquisition-related costs are primarily comprised of direct transaction costs, fair value adjustments for acquired inventory and certain compensation charges. The Company may incur additional acquisition-related costs in the future related to the Xilinx acquisition.
Supplemental Unaudited Pro Forma Information
Following are the supplemental consolidated financial results of the Company, Xilinx and Pensando on an unaudited pro forma basis, as if the acquisitions had been consummated as of the beginning of the fiscal year 2021 (i.e., December 27, 2020).
Three Months Ended Nine Months Ended
September 24, 2022 September 25, 2021 September 24, 2022 September 25, 2021
(In millions)
Net revenue $ 5,565  $ 5,258  $ 18,518  $ 14,290 
Net income (loss) $ 397  $ 224  $ 1,928  $ (369)
The Company’s fiscal year ends on the last Saturday in December of each year, Xilinx’s fiscal year ended on the Saturday nearest March 31 of each year and Pensando’s fiscal year ended on January 31 of each year. The unaudited pro forma information above is presented on the basis of the Company’s fiscal year and combines the historical results of the fiscal periods of the Company with the following historical results of Xilinx and Pensando: the three months ended September 24, 2022 includes Xilinx and Pensando results for the same period; the three months ended September 25, 2021 includes Xilinx results for the three months ended October 2, 2021 and Pensando results for the three months ended September 30, 2021; the nine months ended September 24, 2022 includes Xilinx results for the nine-month period beginning January 2, 2022 through September 24, 2022 and Pensando results for the nine-month period beginning January 1, 2022 through September 24, 2022; and the nine months ended September 25, 2021 includes Xilinx results for the nine months ended October 2, 2021 and Pensando results for the nine months ended September 30, 2021.
The unaudited pro forma financial information presented is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the Xilinx and Pensando acquisitions were completed at the beginning of fiscal year 2021 and are not indicative of the future operating results of the combined company. The pro forma results include adjustments related to purchase accounting, primarily amortization of acquisition-related intangible assets, fixed asset depreciation expense and expense from assumed stock-based compensation awards. The pro forma results also include amortization expense of acquired Xilinx inventory fair value step-up of $184 million in the first quarter of fiscal year 2021 and no Xilinx inventory fair value step-up expense in fiscal year 2022.