Acquisitions

2018 Acquisitions

On April 18, 2018, the Company acquired all of the equity interests in Metronode from the Ontario Teachers' Pension Plan Board for a cash purchase price of A$1.033 billion or approximately $804.1 million at the exchange rate in effect on April 18, 2018 (the "Metronode Acquisition"). Metronode 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.

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 total consideration of approximately $804.0 million. The consideration was comprised of approximately $45.8 million in cash, subject to customary adjustments, and $758.2 million aggregate fair value of 5.000% senior unsecured notes (see Note 8). Prior to the acquisition, a portion of the building was leased to the Company and was being used as its Dallas 1, 2, 3 and 6 data centers, which were all accounted for as build-to-suit leases. Upon acquisition, the Company effectively terminated the leases and settled the related financing obligations and other liabilities related to the leases for approximately $170.3 million and $1.9 million, respectively, and recognized a loss on debt extinguishment of $19.5 million. 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 Americas market in the future.

Both acquisitions constitute a business under the accounting standard for business combinations and, therefore, were accounted for as business combinations 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.

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



	Metronode			Infomart Dallas
Cash and cash equivalents	$	3,206		$	17,432
Accounts receivable	8,318			637
Other current assets	9,894			395
Property, plant, and equipment	297,092			355,217
Intangible assets	128,229			61,233
Goodwill	373,585			208,799
Deferred tax assets	4,112			—
Other assets ⁽¹⁾	54,338			—
Total assets acquired	878,774			643,713
Accounts payable and accrued liabilities	(17,104		)	(5,056		)
Other current liabilities	(2,038		)	(2,141		)
Other liabilities ⁽¹⁾	(55,581		)	(4,724		)
Net assets acquired	$	804,051		$	631,792


(1)	In connection with the Metronode Acquisition, the Company recorded indemnification assets of $54.3 million, which represented the seller's obligation under the purchase agreement to reimburse pre-acquisition tax liabilities settled after the acquisition.

The following table presents certain information on the acquired intangible assets (in thousands):



Intangible Assets	Fair Value		Estimated Useful Lives (Years)	Weighted-average Estimated Useful Lives (Years)
Customer relationships (Metronode)	$	128,229	20.0	20.0
Customer relationships (Infomart Dallas)	31,195		20.0	20.0
In-place leases (Infomart Dallas)	19,959		3.6 - 7.5	6.8
Trade names (Infomart Dallas)	9,614		20.0	20.0
Favorable leases (Infomart Dallas)	465		3.6 - 7.5	7.0

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 rates of 7.3% for Metronode and 8.0% for Infomart Dallas, which reflected the nature of the assets as they relate to the risk and uncertainty of the estimated future operating cash flows. Other assumptions used to estimate the fair value of customer relationships included projected revenue growth, probability of renewal, customer attrition rates and operating margins. The fair value of Infomart Dallas' trade name was estimated using the relief from royalty approach. The Company applied a relief from royalty rate of 1.5% and a discount rate of 8.0%. The fair value of in-place leases was estimated by projecting the avoided costs, such as the cost of originating the acquired in-place leases, during a typical lease up period. 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, with the exception of land which was estimated by applying the market approach, for the Metronode Acquisition. For the Infomart Dallas Acquisition, the fair values of land, building and personal property were estimated by applying the market approach, residual income method and cost approach, respectively. The cost approach uses 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. The residual income method estimates the fair value of the Infomart Dallas building using an income approach less the fair values attributed to land, personal property, in-place leases and favorable and unfavorable leases.

As of September 30, 2018, the Company had not completed the detailed valuation analysis of Metronode or Infomart Dallas to derive the fair value of the following items including, but not limited to: property, plant and equipment, intangible assets and related tax impacts; 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. During the quarter ended September 30, 2018, the Company updated the preliminary allocation of purchase price for Metronode and Infomart Dallas from the provisional amounts reported as of June 30, 2018. The adjustments made during the three months ended September 30, 2018 primarily resulted in a decrease in property, plant and equipment of $10.1 million and an increase in goodwill and intangible assets of $5.0 million and $4.8 million, respectively, for Metronode Acquisition. The adjustments for Infomart Dallas Acquisition primarily resulted in a decrease in property, plant and equipment of $6.8 million and an increase in goodwill of $5.2 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 the three and nine months ended September 30, 2018.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. Goodwill is attributable to the workforce of the acquired business and the projected revenue increase expected to arise from future customers after the Metronode and Infomart Dallas acquisitions. Goodwill from the acquisition of Metronode is not amortizable for local tax purposes and is attributable to the Company's Asia-Pacific region. Goodwill from the acquisition of Infomart Dallas is expected to be deductible for local tax purposes and is attributable to the Company's Americas region. Operating results of Metronode and Infomart Dallas have been reported in the Asia-Pacific and Americas regions, respectively.

The Company incurred acquisition costs of approximately $31.5 million for the nine months ended September 30, 2018 and insignificant acquisition costs for the three months ended September 30, 2018 for both acquisitions. For the three months ended September 30, 2018, the Company's results of operations include $28.1 million of revenues and insignificant net income from operations from the combined operations of Metronode and Infomart Dallas. For the nine months ended September 30, 2018, the Company's results of operations include $52.1 million of revenues and $2.7 million of net income from operations from the combined operations of Metronode and Infomart Dallas.

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 incurred acquisition costs of approximately $1.2 million and $27.6 million during the three and nine months ended September 30, 2017, respectively.

Purchase Price Allocation

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 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 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, with the exception of land which was estimated by applying the market approach. The cost approach is to use the replacement or reproduction cost as an indicator of fair value. The 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 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. Goodwill is expected to be deductible for U.S. tax purposes and is attributable to the Company's Americas region. For the three months ended September 30, 2018 and 2017, the Company's results of operations included the Verizon Data Center Acquisition's revenues of $133.3 million and $137.0 million, respectively, and net income from operations of $35.1 million and $29.2 million, respectively. For the nine months ended September 30, 2018 and 2017, Verizon Data Center Acquisition's revenues were $401.5 million and $223.7 million, respectively, and net income from operations were $105.2 million and $56.3 million, respectively.

Other 2017 Acquisitions

In addition to the Verizon Data Center Acquisition, the Company also acquired Itconic and Zenium's data center business during 2017. Acquisition costs incurred for these acquisitions during the three and nine months ended September 30, 2018 were not significant to the Company's condensed consolidated statements of operations.

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. 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. The Company applied a discount rate of 16.0%, which reflected the risk and uncertainty of the estimated future operating cash flows. Other assumptions included 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. Zenium'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.

During the three months ended September 30, 2018, the Company completed the detailed valuation analysis to derive the fair value of assets acquired and liabilities assumed from the Itconic and the Zenium data center acquisitions and updated the final allocation of purchase price from the provisional amounts reported as of December 31, 2017. The adjustments for Zenium data center acquisition 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. The adjustments for Itconic primarily resulted in a decrease in property, plant and equipment of $3.6 million and an increase in goodwill of $2.6 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 the three and nine months ended September 30, 2018.

The final purchase price allocations for both acquisitions are as follows (in thousands):



	Itconic			Zenium data center
Cash and cash equivalents	$	15,659		$	692
Accounts receivable	16,429			198
Other current assets	1,885			6,430
Property, plant, and equipment	64,499			58,931
Intangible assets	101,755			7,900
Goodwill	127,711			21,834
Other assets	4,025			313
Total assets acquired	331,963			96,298
Accounts payable and accrued liabilities	(15,846		)	(1,012		)
Other current liabilities	(12,374		)	(451		)
Capital lease and other financing obligations	(30,666		)	—
Loans payable	(3,253		)	—
Deferred tax liabilities	(3,198		)	(2,227		)
Other liabilities	(7,515		)	(614		)
Net assets acquired	$	259,111		$	91,994

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. As of December 31, 2017, the Company finalized the allocation of purchase price for the acquisition.

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 September 30, 2017, the incremental revenues from the IO Acquisition were not significant and for the nine months ended September 30, 2017, the incremental revenues were $4.0 million. The incremental net losses were not significant for both periods. For the three and nine months ended September 30, 2018, the Company's results of operations include $21.5 million and $63.6 million of revenues, respectively, 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 and nine months ended September 30, 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 and nine months ended September 30, 2017 (in thousands, except per share amounts):



	Three Months Ended September 30, 2017		Nine months ended September 30, 2017
Revenues	$	1,152,261	$	3,309,381
Net income from operations	80,135		194,504
Basic EPS	1.03		2.50
Diluted EPS	1.02		2.48