6 Acquisitions

There were no acquisitions in 2007, but the following acquisitions were made in 2005 and 2006.

Falanx Microsystems AS

On 30 May 2006, the Company purchased the entire share capital of Falanx Microsystems AS (Falanx), a graphics IP company incorporated in Norway for total consideration of $25.1 million (£13.4 million), comprising $24.9 million cash consideration and $0.2 million of related acquisition expenses.

Falanx developed graphics accelerator IP and software for semiconductor system-on-chip (SoC) vendors that delivered high-quality multimedia images without compromising performance, power consumption or system cost. The acquisition fits the ARM strategy of enabling users to create SoCs seamlessly in their design process. The Mali Graphics Processor Unit (GPU) is a combination of hardware and software that enables industry-leading 3D graphics and video on mobile ‘phones, portable media players, set-top boxes, handheld gaming devices and automotive systems, providing the Company with full control over the development of its future 3D graphics solutions.

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date.

The operating results for Falanx have been included in these financial statements for the period from 30 May 2006 to 31 December 2006 in the 2006 comparatives and for the entire year in 2007. The acquisition was accounted for under FAS 141.

The following table sets out the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition as reported in the 2006 annual report:

The intangible assets recognized, apart from goodwill, represented contractual or other legal rights of Falanx and those intangible assets of Falanx that could be clearly identified. These intangibles were identified and valued through interviews and analysis of data provided by Falanx concerning development projects, their stage of development, the time and resources needed to complete them, and if applicable, their expected income generating ability. There were no other contractual or other legal rights of Falanx clearly identifiable by management, other than those identified below. The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows:

If the acquisition of Falanx had occurred on 1 January 2006, net income for the Company in 2006 would have been £0.8 million lower than reported, including the additional amortization of intangibles.

During 2007, the provisional fair values of Falanx’s accounts receivable and other creditors were finalized resulting in a reduction in net assets acquired of £17,000. As a result, goodwill increased by £17,000 during the year.

Soisic SA

On 30 October 2006, the Company purchased the entire share capital of Soisic SA (Soisic), a silicon-on-insulator (SOI) IP company incorporated in France for consideration of €5.1 million (£3.4 million), comprising €4.7 million cash consideration and €0.4 million of related acquisition expenses.

With this acquisition, the Company is making an investment in new technologies related to physical IP to enhance its leadership position in providing customers access to the higher performance and lower power offered by SOI process technologies. Soisic develops a similar set of products to the ARM Physical IP Division, specifically standard cells, static random access memory (SRAM) compilers and input/output (I/O) cells, however, based on SOI design rules and process models. Integrating this capability with ARM’s widely-used physical IP opens the possibility for system-on-chip (SoC) designers to access SOI technology, which currently is used only in full custom designs, such as high-performance microprocessors.

The Company is investing in this area to be at the forefront of the design technologies needed to exploit the potential advantages of SOI as its usage grows in mobile, home and enterprise SoC and ASIC applications.

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date. A further €8 million was potentially payable on the achievement of various post-acquisition financial milestones and will be accrued when the milestones have been achieved, other than as noted below, whereby a small portion of this contingent consideration was accrued at acquisition.

The operating results for Soisic have been included in these financial statements for the period from 30 October 2006 to 31 December 2006 in the 2006 comparatives and for the entire year in 2007. The acquisition was accounted for under FAS 141.

The following table sets out the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition as reported in the 2006 annual report:

The intangible assets recognized represented those intangible assets of Soisic that could be clearly identified. These intangibles were identified and valued through interviews and analysis of data provided by Soisic concerning development projects, their stage of development, the time and resources needed to complete them, and if applicable, their expected income generating ability. There were no other contractual or other legal rights of Soisic clearly identifiable by management, other than those identified below. The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows:

The purchase price above includes £0.1 million of contingent consideration. Whilst the Company does not normally accrue this payable until earned, in line with FAS 141 it has been accrued to reduce any potential negative goodwill to nil.

If the acquisition of Soisic had occurred on 1 January 2006, net income for the Company would have been £2.5 million lower than reported, including the additional amortization of intangibles.

During 2007, a proportion of the financial milestones were achieved resulting in €1.3 million (£0.9 million) consideration being accrued in addition to the amount accrued in 2006. There was a corresponding increase to goodwill as a result. Furthermore, the provisional fair values in respect of deferred tax were finalized resulting in an increase in net assets of £0.7 million and a corresponding reduction in goodwill. The net impact of these items resulted in an increase to goodwill of £0.2 million.

PowerEscape Inc.

On 21 June 2006, the Company purchased certain assets of PowerEscape Inc., a private company incorporated in the US, for total consideration of $1.1 million (£0.6 million), comprising $1.0 million cash consideration and $0.1 million of related acquisition expenses.

The PowerEscape team, which has been integrated into the Company’s Development System Division, will focus on adding innovative profiling and analysis features to the Company’s portfolio of market-leading development tools.

The Company has allocated £595,000 of the purchase price to in-process research and development which reflects certain research projects that have not yet reached technological feasibility and commercial viability or had no alternative future use at the time of the acquisition. In-process research and development has been written-off immediately to the income statement.

Keil Elektronik GmbH and Keil Software Inc.

On 27 October 2005, the Company purchased the entire share capital of Keil Elektronik GmbH (KEG), a company incorporated in Germany for total consideration of $10.9 million (£6.1 million), comprising $10.4 million cash consideration and $0.5 million of related acquisition expenses. On the same day, the Company purchased the entire share capital of Keil Software Inc. (KSI), a US company, for total consideration of $5.2 million (£2.9 million), comprising $5.0 million cash consideration and $0.2 million of related acquisition expenses.

The Company has identified the MCU market as a critical growth area for the Company’s future business and with this acquisition, the Company will be able to accelerate progress in that market by offering a more complete solution. As the MCU applications shift from 8/16-bit to 32-bit solutions, the combination of the ARM Cortex-M3 processor, which is ideally suited for microcontroller applications, the RealView high-performance compiler, and Keil’s complementary MCU tools for ARM, will enable new generations of ARM MCU solutions.

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date. A further $2.3 million for KEG and $1.0 million for KSI was potentially payable on the achievement of various post-acquisition financial milestones. The financial milestones relating to the first year post-acquisition were achieved in 2006 and are accrued at the year end. Further potential payments relating to the second year post-acquisition will be accrued when payable. Keil is a leading independent provider of software development tools for the microcontroller (MCU) market.

The acquisition was accounted for under FAS 141. The operating results for Keil have been included in these financial statements for the period 27 October 2005 to 31 December 2005 in the 2005 comparatives and for the entire year in 2006 and 2007.

The following table sets out the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition as reported in the 2005 annual report:

The intangible assets recognized, apart from goodwill, represented contractual or other legal rights of Keil and those intangible assets of Keil that could be clearly identified. These intangibles were identified and valued through interviews and analysis of data provided by Keil concerning development projects, their stage of development, the time and resources needed to complete them, and if applicable, their expected income generating ability. There were no other contractual or other legal rights of Keil clearly identifiable by management, other than those identified below. The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows:

KEG made a profit after tax for the year ended 31 December 2004 of £1.0 million and for the period from 1 January 2005 until acquisition a profit after tax of £1.0 million. KSI made a loss after tax for the year ended 31 December 2004 of £95,000 and for the period from 1 January 2005 until acquisition a loss after tax of £40,000. The results of the Company would not have been significantly different had the acquisition of KEG and KSI occurred on the 1 January 2005.

During 2006 and 2007, a further $2.1 million and $0.8 million consideration became payable for KEG and KSI respectively following the achievement of various post-acquisition financial milestones, with a corresponding increase to total consideration and goodwill. In addition in 2006, the provisional fair values in respect of KEG’s income tax liabilities were finalized resulting in an increase in the net assets acquired by £1.1 million. Due to this change in fair value, an additional £1.1 million of consideration was paid. As both consideration and net assets were increased by the same amount, there was no corresponding change to goodwill.