Acquisition

9 Months Ended

Sep. 30, 2021

On June 7, 2021, Switch, Ltd. acquired all of the equity interests of Data Foundry and certain real property interests used in connection with Data Foundry’s operations for an estimated total cash consideration of $415.6 million, which includes an estimated $6.5 million to be paid over the next 12 months following the acquisition date upon the finalization of certain closing conditions, and net of cash, cash equivalents, and restricted cash acquired of $4.6 million. Switch, Ltd. funded this acquisition by issuing $500.0 million aggregate principal amount of its 4.125% senior unsecured notes due 2029 (see Note 6 “Long-Term Debt” for additional information). Data Foundry is a carrier-neutral provider of colocation space and related services with data centers in Austin and Houston, Texas. The acquisition is expected to complement and diversify the Company’s existing geographic footprint and revenue exposure by providing future expansion opportunities in Texas. The Company accounted for this acquisition as a business combination.

Acquisition-related costs of $0.1 million and $4.5 million were recorded within selling, general and administrative expense on the consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2021, respectively.

The preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on preliminary estimates of fair value at the acquisition date is as follows (in thousands):


Cash and cash equivalents	$	4,486
Restricted cash	78
Accounts receivable	1,461
Prepaid expenses	2,080
Property and equipment	188,111
Operating lease right-of-use assets(1)	3,946
Goodwill	106,473
Customer relationships(2)	125,000
Other assets	10
Total assets acquired	$	431,645

Accounts payable	$	(1,437)
Accrued salaries and benefits	(561)
Accrued expenses and other	(1,532)
Accrued construction payables	(1,558)
Customer deposits	(2,447)
Operating lease liability, current portion	(461)
Operating lease liability	(3,486)
Total liabilities assumed	$	(11,482)
Net assets acquired	$	420,163

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(1)Included within other assets on the consolidated balance sheet.

(2)Included within intangible assets, net on the consolidated balance sheet with an amortization period of 20 years.

Estimated fair value of property and equipment acquired consists of the following at the acquisition date (in thousands):


Land and land improvements	$	23,516
Buildings, building improvements, and leasehold improvements	74,596

Data center equipment	82,320

Core network equipment	36

Computer equipment, furniture and fixtures	2,642
Finance lease right-of-use assets	3,000
Construction in progress	2,001
Total property and equipment	$	188,111

The preliminary fair value estimate of customer relationships was measured using Level 3 inputs under the multi-period excess earnings method as of the acquisition date. The following summarizes information for unobservable inputs categorized as Level 3:


Long-term revenue growth rate	2.0	%
Attrition rate	6.6	%
Discount rate	10.0	%

The preliminary fair value estimate of land was measured as of the acquisition date using Level 2 inputs comprised of prices in observed transactions involving comparable assets. The preliminary fair value estimates of all other property and equipment were measured as of the acquisition date using Level 2 inputs regarding replacement costs, normal useful lives, market depreciation, and salvage values, with the exception of construction in progress, which was measured at historical cost.

Working capital accounts and other assets were measured at the existing carrying values.

The allocation of the purchase price to assets and liabilities will be finalized when the Company completes its evaluation of certain balances, estimates, and assumptions during the measurement period (up to one year from the acquisition date). The most significant open items necessary to complete are related to working capital, property and equipment, intangible assets, and the related impact to goodwill.

Goodwill arising from the acquisition is primarily attributable to the assembled workforce of Data Foundry and anticipated operational synergies. All goodwill recognized is expected to be deductible for income tax purposes.

Data Foundry contributed $12.0 million to revenue and $0.1 million to net income attributable to Switch, Inc. for the three months ended September 30, 2021, and $15.3 million to revenue and $0.3 million to net income attributable to Switch, Inc. for the nine months ended September 30, 2021. Supplemental pro forma results of operations for the Company, assuming the acquisition had occurred on January 1, 2020, are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
Revenue	$	158,104	$	141,143	$	451,117	$	421,714
Net (loss) income attributable to Switch, Inc.	$	(342)	$	3,397	$	13,376	$	1,872

The above supplemental pro forma results of operations include the following adjustments and related income tax and noncontrolling interest impacts after applying the Company’s accounting policies:

•additional depreciation and amortization expense reflecting the fair value adjustments to property and equipment and intangible assets;

•adjustment to interest expense to reflect the removal of Data Foundry’s debt and the issuance of Switch, Ltd.’s $500.0 million aggregate principal amount of its 4.125% senior unsecured notes due 2029 in conjunction with the acquisition; and

•adjustment to reflect acquisition-related costs incurred during the three and nine months ended September 30, 2021 as incurred during the nine months ended September 30, 2020.