What happened

Data center real estate investment trust DuPont Fabros Technology (NYSE:DFT) announced early Friday morning that it would be merging with industry heavyweight Digital Realty Trust (NYSE:DLR). Under the terms of the deal, DuPont Fabros shareholders will receive 0.545 shares of Digital Realty for every share of DuPont Fabros they own.

Digital Realty's stock trades for just over $116 per share as I write this, which translates into an offer valuation of $63.22 for DuPont Fabros shares. This is a 14% premium over DuPont Fabros' previous closing price, which is why the stock subsequently shot up by a similar amount.

Data cables plugged into a server.

Image source: Getty Images.

Now what

The merger transaction is subject to normal closing conditions, such as approval by both companies' shareholders. Digital Realty announced that it has obtained a bridge loan commitment to finance the transaction, if it chose to use it.

Both companies' boards of directors have approved the deal, and expect the merger to close during the second half of the year.

So what

Generally speaking, companies are willing to pay a premium for their acquisition targets because they feel like the target adds more value as part of the acquirer's operation than is currently reflected in its stock price. And that's the case here.

According to the press release revealing the agreement, Digital Realty says that it will receive the following benefits, just to name a few:

  • Cost efficiencies. The merger is expected to save $18 million annually in overhead expenses.
  • Scale. The combined company will have a larger operation, which can mean enhanced financial flexibility and other such benefits.
  • DuPont Fabros has a large development pipeline of properties in existing Digital Realty markets. Not only does the merger eliminate this element of competition, but with the properties under construction just 48% pre-leased, it creates an opportunity to grow revenue.
  • The merger will add to Digital Realty's presence in high-growth data center markets such as Northern Virginia, Chicago, and Silicon Valley.

The bottom line is that Digital Realty thinks that the merger with DuPont Fabros will help it achieve its goal of being a leader in the data center business, and will add significant value to its operations.

Matthew Frankel owns shares of Digital Realty Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.