| Acquisitions | Acquisitions Paris IBX Data Center Acquisition On August 1, 2016, the Company completed the purchase of Digital Realty Trust, Inc.'s ("Digital Realty") operating business, including its real estate and facility, located in St. Denis, Paris for cash consideration of approximately €193,292,000 or $215,869,000 at the exchange rate in effect on August 1, 2016 (the "Paris IBX Data Center Acquisition"). A portion of the building was leased to the Company and was being used by the Company as its Paris 2 and Paris 3 data centers. The Paris 2 lease was accounted for as an operating lease and the Paris 3 lease was accounted for as a financing lease. Upon acquisition, the Company in effect terminated both leases. The Company settled the financing lease obligation of Paris 3 for €46,726,000 or approximately $52,219,000 and recognized a loss on debt extinguishment of €8,828,000 or approximately $9,894,000 . The remainder of the building was leased to other tenants, which became the Company's tenants upon closing. The Paris IBX Data Center Acquisition constitutes a business under the accounting standard for business combinations and as a result, the Paris IBX Data Center Acquisition was accounted for as a business combination using the acquisition method of accounting. The Company included the incremental Paris IBX Data Center's results of operations from August 1, 2016 and the estimated fair value of assets acquired and liabilities assumed in its consolidated balance sheets beginning August 1, 2016. The Company incurred acquisition costs of approximately $10,962,000 during the three and nine months ended September 30, 2016 related to the Paris IBX Data Center Acquisition. Purchase Price Allocation 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. As of the date of this quarterly report, the Company has not completed the detailed valuation analysis to derive the fair value of the following items including, but not limited to property, plant and equipment, intangible assets and leasehold interests. Therefore, the allocation of the purchase price to acquired assets and liabilities is based on provisional estimates and is subject to continuing management analysis, with assistance of third party valuation advisers. The preliminary purchase price allocation, which excludes settlement of the Paris 3 financing obligations, was as follows (in thousands): Cash and cash equivalent $ 4,073 Accounts receivable 1,507 Other current assets 794 Property, plant, and equipment 138,568 Intangible assets 11,758 Goodwill 45,187 Other assets 82 Total assets acquired 201,969 Accounts payable and accrued liabilities (2,044 ) Other current liabilities (2,798 ) Deferred tax liabilities (32,687 ) Other liabilities (790 ) Net assets acquired $ 163,650 The following table presents certain information on the acquired identifiable intangible assets (dollars in thousands): Intangible assets Fair value Estimated useful lives (years) Weighted-average estimated useful lives (years) In-place leases $ 7,485 0.9 - 9.4 4.3 Favorable leasehold interests 4,273 1.9 - 6.7 5.3 The fair value of in-place lease value may consist of a variety of components including, but not necessarily limited to: the value associated with avoiding the cost of originating the acquired in-place leases; the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed re-leasing period (i.e. real estate taxes, insurance and other operating expenses), the value associated with lost rental revenue from existing leases during the assumed re-leasing period; the value associated with avoided tenant improvement and leasing commission costs or other inducements to secure a tenant lease and the avoided costs for rent abatements or rent free periods. The fair value of favorable leases was estimated based on the income approach. The favorable leasehold interests were determined on a lease-by-lease basis by computing the net present value of the difference between the contractual amounts to be paid pursuant to the lease agreements and estimates of the fair market lease rates for the corresponding in place leases measured over remaining non-cancellable terms of the leases. 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 the property, plant and equipment was estimated by applying the income approach or cost approach. The income approach is used to estimate fair value based on the income stream, such as cash flows or earnings that an asset can be expected to generate over its useful life. There are two primary methods of applying the income approach to determine the fair value of assets: the discounted cash flow method and the direct capitalization method. The key assumptions include the estimated earnings, discount rate and direct capitalization rate. 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 that the asset could be replaced or reproduced. The key assumptions of the cost approach include replacement cost, physical deterioration, functional and economic obsolescence, economic useful life, remaining useful life, age and effective age. The incremental results of operations from Paris IBX Data Center Acquisition are not significant; therefore the Company does not present pro forma combined results of operations. For the three months ended September 30, 2016, the incremental revenues and net income recorded from the Paris IBX Data Center Acquisition were not significant to the Company’s consolidated statement of operations. TelecityGroup Acquisition On January 15, 2016, the Company completed the acquisition of the entire issued and to be issued share capital of TelecityGroup. TelecityGroup operates data center facilities in cities across Europe. The acquisition of TelecityGroup enhances the Company's existing data center portfolio by adding new IBX metro markets in Europe including Dublin, Helsinki, Istanbul, Manchester, Milan, Sofia, Stockholm and Warsaw. As a result of the transaction, TelecityGroup has become a wholly-owned subsidiary of Equinix. Under the terms of the acquisition, the Company acquired all outstanding shares of TelecityGroup and all vested equity awards of TelecityGroup at 572.5 pence in cash and 0.0336 new shares of Equinix common stock for a total purchase consideration of approximately £2,624,500,000 or approximately $3,743,587,000 . In addition, the Company assumed $1,299,000 of vested TelecityGroup's employee equity awards as part of consideration transferred. The Company incurred acquisition costs of approximately $50,484,000 during the nine months ended September 30, 2016 related to the TelecityGroup acquisition. In connection with the TelecityGroup acquisition, the Company placed £322,851,000 or approximately $475,689,000 into a restricted cash account, which was included in the current portion of restricted cash in the condensed consolidated balance sheet as of December 31, 2015. The cash was released upon completion of the acquisition. Also, in connection with TelecityGroup acquisition, the Company entered into a bridge credit agreement with J.P. Morgan Chase Bank, N.A. as the initial lender and as administrative agent for the lenders for a principal amount of £875,000,000 or approximately $1,289,000,000 at the exchange rate in effect on December 31, 2015 (the “Bridge Loan”). The Company did not make any borrowings under the Bridge Loan and the Bridge Loan was terminated on January 8, 2016. The Company initially designated the legal entities acquired in the TelecityGroup acquisition as TRSs. As of September 30, 2016, the Company has integrated TelecityGroup Netherlands into the REIT structure through its merger with Equinix Netherlands. Purchase Price Allocation Under the acquisition method of accounting, the assets acquired and liabilities assumed in a business combination shall be measured at fair value at the date of the acquisition. As of the date of this quarterly report, the Company has not completed the detailed valuation analysis to derive the fair value of the following items including, but not limited to, intangible assets, accounting for lease contracts; asset retirement obligations; favorable leasehold interests; assets and liabilities held for sale, deferred revenue; property, plant and equipment; accruals and taxes. Therefore, the allocation of the purchase price to acquired assets and liabilities is based on provisional estimates and is subject to continuing management analysis, with assistance of third party valuation advisers. During the three months ended September 30, 2016, the Company updated the preliminary allocation of purchase price for TelecityGroup based on valuation analysis, which resulted in increases to intangible assets of $46,529,000 and capital lease and other financing obligations $37,449,000 and decreases in goodwill of $21,906,000 , assets held for sale of $46,598,000 and deferred tax liabilities of $21,048,000 . The changes did not have a significant impact on the Company’s results from operations for the three and nine months ended September 30, 2016. The Company may adjust these amounts further as valuations are finalized and the Company obtains information necessary to complete the analyses, but no later than one year from the acquisition date. As of the acquisition date, the preliminary allocation of the purchase price is as follows (in thousands): Cash and cash equivalents $ 73,368 Accounts receivable 24,042 Other current assets 41,079 Assets held for sale 867,917 Property, plant and equipment 1,058,583 Goodwill 2,216,173 Intangible assets 704,014 Deferred tax assets 1,198 Other assets 4,124 Total assets acquired 4,990,498 Accounts payable and accrued expenses (90,589 ) Accrued property, plant and equipment (3,634 ) Other current liabilities (27,259 ) Liabilities held for sale (156,171 ) Capital lease and other financing obligations (162,359 ) Mortgage and loans payable (592,304 ) Deferred tax liabilities (177,715 ) Other liabilities (35,581 ) Net assets acquired $ 3,744,886 The preliminary purchase price allocation above, as of the acquisition date, includes acquired assets and liabilities that were classified by the Company as held for sale (Note 4). The following table presents certain information on the acquired intangible assets (dollars in thousands): Intangible assets Fair value Estimated useful lives (years) Weighted-average estimated useful lives (years) Customer relationships $ 591,956 13.5 13.5 Trade names 72,033 1.5 1.5 Favorable leases 40,025 2.0 - 25.4 19.2 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 a weighted-average discount rate of approximately 8.5% , which reflected the nature of the assets as it relates to the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer relationships include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair value of the TelecityGroup trade name was estimated using the relief of royalty approach. The Company applied a relief of royalty rate of 2.0% and a weighted-average discount rate of approximately 9.0% . The other acquired identifiable intangible assets were estimated by applying a relief of royalty or cost approach as appropriate. 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 the property, plant and equipment was estimated by applying the income approach or cost approach. The income approach is used to estimate fair value based on the income stream, such as cash flows or earnings that an asset can be expected to generate over its useful life. There are two primary methods of applying the income approach to determine the fair value of assets: the discounted cash flow method and the direct capitalization method. The key assumptions include the estimated earnings, discount rate and direct capitalization rate. 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, physical deterioration, functional and economic obsolescence, economic useful life, remaining useful life, age and effective age. The Company determined the fair value of the loans payable assumed in the TelecityGroup acquisition by estimating TelecityGroup’s debt rating and reviewing market data with a similar debt rating and other characteristics of the debt, including the maturity date and security type. On January 15, 2016, the Company prepaid and terminated these loans payable. In conjunction with the repayment of the loans payable, the Company incurred an insignificant amount of pre-payment penalties and interest rate swap termination costs, which were recorded as interest expense in the condensed consolidated statement of operations. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after the acquisition. Goodwill is not expected to be deductible for local tax purposes. Goodwill will not be amortized and will be tested for impairment at least annually. Goodwill recorded as a result of the TelecityGroup acquisition, except for the goodwill associated with asset held for sale, is attributable to the Company’s EMEA region. For the three months ended September 30, 2016 , the Company's results of continuing operations include TelecityGroup revenues of $107,316,000 and net loss from continuing operations of $15,747,000 . The Company's results of continuing operations include TelecityGroup revenues of $299,001,000 and net loss from continuing operations of $54,426,000 for the period January 15, 2016 through September 30, 2016 . Bit-isle Acquisition On November 2, 2015, the Company completed a cash tender offer for approximately 97% of the equity instruments, including stock options, of Tokyo-based Bit-isle. The Company acquired the remaining outstanding equity instruments of Bit-isle in December 2015. The offer price was ¥922 per share, in an all cash transaction totaling approximately $275,367,000 . The Company acquired Bit-isle to expand additional data centers in Japan for customers' future expansion needs. On September 30, 2015, the Company entered into a term loan agreement (the “Bridge Term Loan Agreement”) with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”). Pursuant to the Bridge Term Loan Agreement, BTMU committed to provide a senior bridge loan facility (the “Bridge Term Loan”) in the amount of up to ¥47,500,000,000 , or approximately $468,350,000 in U.S. dollars at the exchange rate in effect on September 30, 2016 . Proceeds from the Bridge Term Loan were to be used exclusively for the acquisition of Bit-isle, the repayment of Bit-isle’s existing debt and transaction costs incurred in connection with the closing of the Bridge Term Loan and the acquisition of Bit-isle. The Company included Bit-isle’s results of operations from November 2, 2015 and the estimated fair value of assets acquired and liabilities assumed in its consolidated balance sheets beginning November 2, 2015. The Company has designated the legal entities acquired in the Bit-isle acquisition as TRSs. Purchase Price Allocation Under the acquisition method of accounting, the total purchase price was allocated to Bit-isle’s net tangible and intangible assets based upon their fair value as of the Bit-isle acquisition date. Under the accounting guidance, the Company can adjust the fair value of acquired assets and liabilities assumed in the measurement period, as it obtains new information regarding the facts and circumstances that existed at the acquisition date. Based upon the purchase price and the valuation of Bit-isle, the purchase price allocation was as follows (in thousands): Cash and cash equivalents $ 33,198 Accounts receivable 7,359 Other current assets 51,038 Long-term investments 3,806 Property, plant and equipment 308,985 Goodwill 95,444 Intangible assets 111,374 Other assets 22,981 Total assets acquired 634,185 Accounts payable and accrued expenses (15,028 ) Accrued property, plant and equipment (465 ) Capital lease and other financing obligations (108,833 ) Mortgage and loans payable (190,227 ) Other current liabilities (8,689 ) Deferred tax liabilities (32,192 ) Other liabilities (3,384 ) Net assets acquired $ 275,367 The following table presents certain information on the acquired identifiable intangible assets (dollars in thousands): Intangible assets Fair value Estimated useful lives (years) Weighted-average estimated useful lives (years) Customer relationships $ 105,434 13 13 Trade name 3,455 2 2 Favorable solar contracts 2,410 18 18 Other intangible assets 75 0.25 0.25 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 a weighted-average discount rate of approximately 11.0% , which reflected the nature of the assets as it relates to the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer relationships include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair value of the Bit-isle trade name was estimated using the relief of royalty approach. The Company applied a relief of royalty rate of 2.0% and a weighted-average discount rate of approximately 12.0% . The other acquired identifiable intangible assets were estimated by applying an income or cost approach as appropriate. 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 the property, plant and equipment was estimated by applying the income approach or cost approach. The income approach is used to estimate fair value based on the income stream, such as cash flows or earnings that an asset can be expected to generate over its useful live. There are two primary methods of applying the income approach to determine the fair value assets: the discounted cash flow method and the direct capitalization method. The key assumptions include the estimated earnings, discount rate and direct capitalization rate. 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 that 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 Company determined the fair value of the loans payable assumed in the Bit-isle Acquisition by estimating Bit-isle’s debt rating and reviewed market data with a similar debt rating and other characteristics of the debt, including the maturity date and security type. During the year ended December 31, 2015, the Company prepaid and terminated the majority of these loans payable. In conjunction with the repayment of the loans payable, the Company incurred an insignificant amount of pre-payment penalties and interest rate swap termination costs, which were recorded as interest expense in the consolidated statement of operations for the year ended December 31, 2015. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after the acquisition. The goodwill is not expected to be deductible for local tax purposes. Goodwill will not be amortized and will be tested for impairment at least annually. Goodwill recorded as a result of the Bit-isle acquisition is attributable to the Company’s Asia-Pacific region. For the three and nine months ended September 30, 2016 , the Company's results of continuing operations include Bit-isle revenues of $39,745,000 and $111,243,000 , respectively, and Bit-isle net losses of $9,714,000 and $16,091,000 , respectively. Nimbo Acquisition On January 14, 2015, the Company acquired all of the issued and outstanding share capital of Nimbo, a company which specializes in migrating business applications to the cloud with extensive experience moving legacy applications into a hybrid cloud architecture, and connecting legacy data centers to the cloud, for a cash payment of $10,000,000 and a contingent earn-out arrangement to be paid over two years (the “Nimbo Acquisition”). Subsequent to the acquisition, Nimbo adopted the name Equinix Professional Services for Cloud. The Nimbo Acquisition was accounted for using the acquisition method. As a result of the Nimbo Acquisition, the Company recorded goodwill of $17,192,000 , which represents the excess of the total purchase price over the fair value of the assets acquired and liabilities assumed. The Company recorded the contingent earn-out arrangement at its estimated fair value. The results of operations for Nimbo are not significant to the Company; therefore, the Company does not present its purchase price allocation or pro forma combined results of operations. In addition, any prospective changes in the Company’s earn-out estimates are not expected to have a material effect on the Company’s consolidated statement of operations. Unaudited Pro Forma Combined Consolidated Financial Information The following unaudited pro forma combined consolidated financial information has been prepared by the Company using the acquisition method of accounting to give effect to the TelecityGroup and Bit-isle acquisitions as though the acquisitions occurred on January 1, 2015. The Company completed the TelecityGroup acquisition on January 15, 2016. The operating results of TelecityGroup are included in the condensed consolidated statement of operations for the three months ended September 30, 2016 . TelecityGroup's operating results for the period January 15, 2016 through September 30, 2016 are included in the condensed consolidated statement of operations for the nine months ended September 30, 2016 . The pro forma effect for the period January 1 through January 14, 2016 was insignificant. The unaudited pro forma combined consolidated financial information reflects certain adjustments, such as additional depreciation, amortization and interest expense on assets and liabilities acquired. The unaudited pro forma combined consolidated 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 acquisitions 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 consolidated combined results of operations for the three and nine months ended September 30, 2015 (in thousands): Three months ended September 30, Nine months ended September 30, 2015 2015 Revenues $ 819,423 $ 2,387,117 Net income from continuing operations 61,243 153,488 Basic EPS 0.96 2.41 Diluted EPS 0.95 2.38 |
