SANs offered high-speed connectivity and switch-based architecture that provided some support for "failover functionality. When one device in a system failed, data in the SAN could easily be routed to another device. Veritas code-named its new clustering application Thor. Thor was capable of providing failover support for up to nodes in a SAN and would be able to run on Windows NT as well as Unix-based systems. When Veritas introduced its Cluster Server software in September , the new software allowed the clustering of 32 servers, which meant that one idle server could provide failover support for the other 31 servers.
Later in the year Veritas added modules to its Storage Manager software that helped customers manage disparate servers, storage subsystems, adapters, and other components of SANs. The new modules monitored and managed all aspects of a SAN, thus giving organizations secure universal access to data. Under the agreement with Compaq, the two companies would jointly develop and market storage solutions that combined Veritas's storage management software with Compaq's enterprise-class storage hardware systems.
In addition, the company had a strong distribution channel and a team of experienced developers and marketers. The acquisition would enable Veritas to offer a single storage management product with multiplatform capabilities. Veritas was now in a stronger position to integrate the enterprise segment of the storage market, which had a Unix focus, and the workgroup segment, which had an NT focus.
During Veritas continued to preach the benefits of SANs and to develop initiatives that would make SANs more attractive to business enterprises. The two companies planned to deliver a media server, or software controller, that would link tape libraries across mainframe, Unix, and Windows platforms in Also in January Veritas released its Global Data Manager for NetBackup, which could manage data internationally throughout an enterprise.
ClusterX was a tool that helped administrators manage two-node Microsoft Cluster Service clusters in an enterprise from one console. Veritas and NuView planned to integrate their offerings to develop a single Windows NT console that could manage clusters across platforms. The acquisition was part of Veritas's strategy to develop centralized management consoles for SANs. When Microsoft released Windows , the new operating system had embedded in it some of Veritas's storage management technology.
From to Wall Street drove up Veritas's stock price by percent, according to Forbes. Veritas also entered into a development agreement with Oracle Systems Corporation to facilitate the integration of the two companies' products. Early in the year Veritas and Network Appliance, Inc. We agree. No buy-in payment is required for subsequently developed intangibles.
Yet Hatch unabashedly took such items into account in calculating the requisite buy-in payment rather than limiting the valuation to preexisting intangibles as prescribed by section 1. In fact, respondent readily and repeatedly acknowledged that his valuation took into account income relating to items other than the preexisting intangibles. The useful life of the preexisting product intangibles was, on average, 4 years, and certainly was not perpetual.
By the time a new product became available for purchase, the next generation was already in development. In determining the discount rate 32 for the buy-in payment, Hatch used a weighted average cost of capital WACC 33 derived under the capital asset pricing model capm. Treasury bonds as of March 31, , without adjustments, and determined an equity risk premium of 5 percent.
The equity risk premium is the expected long-term yield for the stock market less the risk-free rate. Hatch applied the 5-percent equity risk premium and an industry beta of 1. Petitioner contends that respondent employed the wrong beta, the wrong equity risk premium, and therefore the wrong discount rate.
Hatch employed an industry beta to calculate the discount rate. He opined that using an industry, rather than a company specific, beta was preferred because, with respect to an individual company, a beta relating to an earlier period is a very poor predictor of the beta for subsequent periods. In fact, the literature upon which Hatch relied establishes that there was no difference between the observed risk premium in the U.
Second, in determining the equity risk premium, Hatch applied the year U. Treasury bond yield as the risk-free rate. Treasury bill rate as the risk-free rate, not the bond rate, and that if the bond rate is used, duration risk has to be taken into account.
The series used as a proxy for the risk-free asset is the yield on the day T-bill. Hatch, however, did not reduce the U. Treasury bond rate and, on cross-examination, acknowledged that he used the wrong risk-free rate. In sum, Hatch employed the wrong beta, the wrong equity risk premium, and thus the wrong discount rate to calculate the requisite buy-in payment.
Hatch also employed large and unrealistic growth rates into perpetuity. Moreover, he could not provide a plausible explanation for the growth rate he employed. Simply put, the growth rate Hatch employed was unreasonable. Petitioner used the CUT method to calculate the buy-in payment. Commissioner, F. Baumol used four parameters to estimate a value for the buy-in payment: The expected economic life of the intangibles, the annual rate at which the value of the intangibles declines as a function of time and new software replacements i.
Baumol chose particular agreements i. Most of the product licenses that Baumol selected provide royalties as a percentage of list price e. Based on his findings, Baumol derived a range of starting royalty rates of 20 to 25 percent of list price and opined that the low end of the range, 20 percent, was the appropriate starting royalty rate for the buy-in payment. Baumol determined that the preexisting product intangibles had a useful life ranging from 2 to 4 years.
Having determined both the starting royalty rate and the useful life, Baumol adjusted the royalty rate by ramping down i. Baumol analyzed royalty degradation and technology aging provisions in third-party agreements as evidence of the appropriate ramp-down rates. Use of the CUT method requires that the controlled and uncontrolled transactions involve the same or comparable intangible property.
We disagree. The OEM agreements Baumol selected do not, however, provide the most reliable measure for calculating the requisite buy-in payment. Baumol chose to use only a select few of those OEM agreements i. We conclude that, collectively, the more than 90 unbundled OEM agreements the parties stipulated are sufficiently comparable to the controlled transaction.
The OEMs actively marketed the bundled products; listed the products on their Web sites; and provided equipment, technical support, and engineering assistance for those products. Because of these factors, OEMs paid a lower royalty rate with respect to bundled products. Thus, customers did not perceive unbundled products to be more reliable or of greater quality than other comparable products.
The OEMs merely listed the unbundled products as an option i. The degree of comparability between controlled and uncontrolled transactions is determined by applying the comparability standards set forth in section 1. The first factor, functional analysis, compares the economically significant activities undertaken, or to be undertaken, in the controlled transactions with the economically significant activities undertaken, or to be undertaken, in the uncontrolled transactions.
See section 1. Respondent is relying on rights involving subsequently developed intangibles to support his assertion that the OEM agreements are not comparable to the controlled transaction. Thus, the focus of the buy-in payment analysis should be on transactions involving preexisting intangibles. For the products in existence on November 3, , there are no significant differences in functionality.
The second factor is the comparability of contractual terms. Determining the degree of comparability between the controlled and uncontrolled transactions requires a comparison of the significant contractual terms that could affect the results of the transactions e.
Respondent contends that the contractual terms of the OEM agreements are not comparable to the controlled transaction for two reasons. While it is true that some OEMs did provide engineering support with respect to bundled products, the provision of engineering support was not a standard contractual term in OEM agreements relating to unbundled products.
Indeed, the provision of engineering support was not a significant factor that affected the results of OEM agreements involving unbundled products. Thus, there are no significant differences in contractual terms. The third factor compares the significant risks borne by the parties that could affect the prices charged or the profit earned in the controlled and uncontrolled transactions. In short, there are no significant differences in risks borne.
The fourth factor compares the significant economic conditions that could affect prices or profit in the controlled transaction to the significant economic conditions that could affect prices or profit in the uncontrolled transactions. Respondent further contends that the OEMs had established sales forces and relationships with resellers and distributors, whereas on the date of the transfer VERITAS Ireland was a startup with no customer relationships or other assets.
We note, however, that both the OEMs and VERITAS Ireland competed in similar geographic markets, incurred similar distribution costs, marketed products that faced similar competition, and were subject to similar economic conditions. While certain economic conditions e. Our analysis of this factor narrowly weighs against a finding of comparability.
The fifth factor compares the property or services provided in the controlled transaction to that provided in the uncontrolled transactions. Explore Compliance Solutions. Experience the power of Veritas Enterprise Data Services. We help solve our customers' biggest challenges.
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