Acquisitions

Acquisition of the Metronode group of companies

On April 18, 2018, the Company acquired all of the equity interests in the Metronode group of companies ("Metronode") from the Ontario Teachers' Pension Plan Board for a cash purchase price of A$1.035 billion or approximately $805.6 million at the exchange rate in effect on April 18, 2018 (the "Metronode Acquisition"). Metronode owned and operated 10 data centers in six metro areas in Australia. The acquisition supports the Company’s ongoing global expansion to meet customer demand in the Asia-Pacific region. Metronode’s operating results will be reported in the Asia-Pacific region following the date of acquisition. The Metronode Acquisition constitutes a business under the accounting standard for business combinations and, therefore, will be accounted for as a business combination using the acquisition method of accounting. Goodwill from the acquisition of Metronode is not expected to be deductible for local tax purposes and is attributable to the Company's Asia-Pacific region. The valuation of assets acquired and liabilities assumed are still being appraised by a third-party and as such, the purchase price allocation is not yet complete.

Acquisition of Infomart Dallas

On April 2, 2018, the Company completed the acquisition of Infomart Dallas, including its operations and tenants, from ASB Real Estate Investments (the "Infomart Dallas Acquisition"), for a purchase price of approximately $781.0 million. The purchase price was comprised of approximately $31.0 million in cash, subject to customary adjustments, and $750.0 million aggregate principal amount of 5.000% senior unsecured notes in five new series with due dates from April 2019 to April 2021, with each series consisting of $150.0 million principal amount. The acquisition of this highly interconnected facility and tenants adds to the Company’s global platform and secures the ability to further expand in the Dallas market with future development.

Infomart Dallas' operating results will be reported in the Americas region following the date of acquisition. The Infomart Dallas Acquisition constitutes a business under the accounting standard for business combinations and, therefore, will be accounted for as a business combination using the acquisition method of accounting. Goodwill from the acquisition of Infomart Dallas is not expected to be deductible for local tax purposes and is attributable to the Company's Americas region. The valuation of assets acquired and liabilities assumed are still being appraised by a third-party and as such, the purchase price allocation is not yet complete.

Certain Verizon Data Center Assets Acquisition

On May 1, 2017, the Company completed the acquisition of certain colocation business from Verizon consisting of 29 data center buildings located in the United States, Brazil and Colombia, for a cash purchase price of approximately $3.6 billion (the "Verizon Data Center Acquisition"). The addition of these facilities and customers adds to the Company's global platform, increases interconnections and assists with the Company's penetration of the enterprise and strategic markets, including government and energy. The Company funded the Verizon Data Center Acquisition with proceeds from debt and equity financings, which closed in January and March 2017.

In connection with the Verizon Data Center Acquisition, the Company entered into a commitment letter (the "Commitment Letter"), dated December 6, 2016, pursuant to which a group of lenders committed to provide a senior unsecured bridge facility in an aggregate principal amount of $2.0 billion for the purposes of funding a portion of the cash consideration for the Verizon Data Center Acquisition. Following the completion of the debt and equity financings associated with the Verizon Data Center Acquisition in March 2017, the Company terminated the Commitment Letter. The Company paid $10.0 million of commitment fees associated with the Commitment Letter and recorded $7.8 million to interest expense in the condensed consolidated statement of operations for the three months ended March 31, 2017.

The Company included the Verizon Data Center Acquisition's results of operations from May 1, 2017 in its condensed consolidated statements of operations and the estimated fair value of assets acquired and liabilities assumed in its condensed consolidated balance sheets beginning May 1, 2017. Acquisition costs incurred for the three months ended March 31, 2018 and 2017 were not significant to the Company's condensed consolidated statements of operations.

Purchase Price Allocation

The Verizon Data Center Acquisition constitutes a business under the accounting standard for business combinations and, therefore, was accounted for as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price is allocated to the assets acquired and liabilities assumed measured at fair value on the date of acquisition. During the three months ended March 31, 2018, the Company has completed the detailed valuation analysis to derive the fair value of assets acquired and liabilities assumed and has updated the final allocation of purchase price from provisional amounts reported as of June 30, 2017, which primarily resulted in a decrease in intangible assets of $9.0 million and an increase in goodwill of $7.7 million. The changes in fair value of acquired assets and liabilities assumed did not have a significant impact on the Company’s results of operations for any reporting periods prior to March 31, 2018.

The final purchase price allocation is as follows (in thousands):



	Certain Verizon Data Center Assets
Cash and cash equivalents	$	1,073
Accounts receivable	2,019
Other current assets	7,319
Property, plant, and equipment	840,335
Intangible assets ⁽¹⁾	1,693,900
Goodwill	1,095,262
Total assets acquired	3,639,908
Accounts payable and accrued liabilities	(1,725		)
Other current liabilities	(2,020		)
Capital lease and other financing obligations	(17,659		)
Deferred tax liabilities	(18,129		)
Other liabilities	(5,689		)
Net assets acquired	$	3,594,686


(1)	The nature of the intangible assets acquired is customer relationships with an estimated useful life of 15 years. Included in this amount is a customer relationship intangible asset for Verizon totaling $245.3 million. Pursuant to the acquisition agreement, the Company formalized agreements to provide pre-existing space and services to Verizon at the acquired data centers.

The fair value of customer relationships was estimated by applying an income approach. The fair value was determined by calculating the present value of estimated future operating cash flows generated from existing customers less costs to realize the revenue. The Company applied discount rates ranging from 7.7% to 12.2%, which reflected the nature of the assets as they relate to the risk and uncertainty of the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of customer relationships include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements.

The fair value of property, plant and equipment was estimated by applying the cost approach. The cost approach is to use the replacement or reproduction cost as an indicator of fair value. The premise of the cost approach is that a market participant would pay no more for an asset than the amount for which the asset could be replaced or reproduced. The key assumptions of the cost approach include replacement cost new, physical deterioration, functional and economic obsolescence, economic useful life, remaining useful life, age and effective age.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. The goodwill is attributable to the workforce of the acquired business and the projected revenue increase expected to arise from future customers after the Verizon Data Center Acquisition. The goodwill is not expected to be deductible for local tax purposes. Goodwill recorded as a result of the Verizon Data Center Acquisition was attributable to the Company's Americas region. For the three months ended March 31, 2018, the Company's results of operations include the Verizon Data Center Acquisition's revenues of $134.8 million and net income from operations of $35.8 million.

Other 2017 Acquisitions

In addition to the Verizon Data Center Acquisition, the Company completed three other acquisitions during 2017. Acquisition costs incurred for these acquisitions during the three months ended March 31, 2018 and 2017 were not significant to the Company's condensed consolidated statements of operations.

A summary of the allocation of total purchase consideration is presented as follows (in thousands):



	Itconic			Zenium data center			IO UK's data center
Cash and cash equivalents	$	15,659		$	692		$	1,388
Accounts receivable	16,429			198			7
Other current assets	1,885			6,430			1,082
Property, plant, and equipment	65,356			58,931			40,251
Intangible assets	101,755			7,900			6,252
Goodwill	126,855			21,834			15,804
Deferred tax assets	—			—			6,714
Other assets	4,025			313			3,396
Total assets acquired	331,964			96,298			74,894
Accounts payable and accrued liabilities	(15,847		)	(1,012		)	(439		)
Other current liabilities	(12,374		)	(451		)	(168		)
Capital lease and other financing obligations	(30,666		)	—			(33,091		)
Loans payable	(3,253		)	—			(4,067		)
Deferred tax liabilities	(3,198		)	(2,227		)	—
Other liabilities	(7,515		)	(614		)	(828		)
Net assets acquired	$	259,111		$	91,994		$	36,301

On October 9, 2017, the Company completed the acquisition of Itconic for a cash purchase price of €220.5 million or $259.1 million at the exchange rate in effect on October 9, 2017. Itconic was a data center provider in Spain and Portugal, and also included CloudMas, an Itconic subsidiary which was focused on supporting enterprise adoption and use of cloud services. The acquisition included five data centers in four metro areas, with two located in Madrid and one each in Barcelona, Seville and Lisbon. Itconic’s operating results have been reported in the EMEA region following the date of acquisition.

The nature of the intangible assets acquired from the Itconic acquisition is customer relationships with an estimated useful life of 15 years. The fair value of customer relationships was estimated by applying an income approach, by calculating the present value of estimated future operating cash flows generated from existing customers less costs to realize the revenue. The Company applied discount rate of 16.0%, which reflects the risk and uncertainty of the estimated future operating cash flows. Other significant assumptions include projected revenue growth, customer attrition rates and operating margins. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements. Goodwill is attributable to the workforce of the acquired business and the projected revenue increase from future customers expected to arise after the acquisition.

On October 6, 2017, the Company acquired Zenium's data center business in Istanbul for a cash payment of approximately $92.0 million. The acquired facility located in Istanbul, Turkey has been renamed as the Istanbul 2 ("IL2") data center. IL2’s operating results have been reported in the EMEA region following the date of acquisition. The nature of the intangible assets acquired from this acquisition is customer relationships with an estimated useful life of 15 years.

As of March 31, 2018, the Company has not completed the detailed valuation analysis of Itconic or the Zenium data center to derive the fair value of the following items including, but not limited to: property, plant and equipment, intangible assets and deferred taxes; therefore, the allocation of the purchase price to assets acquired and liabilities assumed is based on provisional estimates and is subject to continuing management analysis. As of March 31, 2018, the Company has updated the preliminary allocation of purchase price for Itconic and Zenium data center from the provisional amounts reported as of December 31, 2017. The adjustments made during the three months ended March 31, 2018 primarily resulted in an increase in property, plant and equipment of $5.2 million and a corresponding decrease in other assets of $5.2 million for Zenium data center acquisition, while the adjustments made for Itconic were not significant. The changes in fair value of acquired assets and liabilities assumed did not have a significant impact on the Company’s results of operations for the three months ended March 31, 2018.

On February 3, 2017, the Company acquired IO UK's data center operating business in Slough, United Kingdom, for a cash payment of £29.1 million or approximately $36.3 million at the exchange rate in effect on February 3, 2017 ("IO Acquisition"). The acquired facility was renamed London 10 ("LD10") data center. LD10's operating results have been reported in the EMEA region following the date of acquisition. The nature of the intangible assets acquired from this acquisition is customer relationships with an estimated useful life of 10 years. As of December 31, 2017, the Company has finalized the allocation of purchase price for the IO Acquisition from the provisional amounts first reported as of March 31, 2017 and the adjustments made during the year ended December 31, 2017 were not significant. The changes in fair value of acquired assets and liabilities assumed did not have a significant impact on the Company’s results of operations for any reporting periods prior to December 31, 2017.

Goodwill from the acquisitions of Itconic, the Zenium data center and IO UK's data center is not deductible for local tax purposes and is attributable to the Company's EMEA region. For the three months ended March 31, 2017, the incremental revenues and net loss recorded from the IO Acquisition were not significant to the Company's results of operations. For the three months ended March 31, 2018, the Company's results of operations include $19.7 million of revenues from the combined operations of Itconic, the Zenium data center and IO UK’s data center and an insignificant net loss from operations.

Unaudited Pro Forma Combined Financial Information

The following unaudited pro forma combined financial information has been prepared by the Company using the acquisition method of accounting to give effect to the Verizon Data Center Acquisition as though it occurred on January 1, 2017. The incremental results of operations from the other acquisitions are not significant and are therefore not reflected in the pro forma combined results of operations.

The Company completed the Verizon Data Center Acquisition on May 1, 2017. The unaudited pro forma combined financial information for the three months ended March 31, 2017 combine the actual results of the Company and the actual Verizon Data Center Acquisition operating results for the period prior to the acquisition date and reflect certain adjustments, such as additional depreciation, amortization and interest expense on assets and liabilities acquired and acquisition financings.

The Company and Verizon entered into agreements at the closing of the Verizon Data Center Acquisition pursuant to which the Company will provide space and services to Verizon at the acquired data centers. These arrangements are not reflected in the unaudited pro forma combined financial information.

The unaudited pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have actually been reported had the acquisition occurred on the above dates, nor is it necessarily indicative of the future results of operations of the combined company.

The following table sets forth the unaudited pro forma combined results of operations for the three months ended March 31, 2017 (in thousands, except per share amounts):



	Three months ended March 31, 2017
Revenues	$	1,055,805
Net income from operations	41,958
Basic EPS	0.54
Diluted EPS	0.54