You close a $675 million acquisition. Within months, you discover that several of the target’s largest customers canceled or modified their contracts before closing — and nobody told you. You estimate the churn cost you $22 million in overpayment. You sue for breach of the purchase agreement. You lose.
That’s what happened to Zayo Group in Zayo Group, L.L.C. v. Latisys Holdings, L.L.C., C.A. No. 12874-VCS (Oct. 26, 2018), Vice Chancellor Slights’s 2018 opinion that opens with a blunt reminder: “In law, as in life, the well-known principle of caveat emptor comes as a rude awakening to many-a-buyer.” The court found that Latisys didn’t breach the Stock Purchase Agreement because the SPA’s representations and warranties simply didn’t cover what Zayo was complaining about. And even if there had been a breach, Zayo’s damages expert was rejected because his methodology didn’t fit the facts. The buyer walked away with nothing.
For M&A counsel, the case is a concrete tutorial in two things that go wrong after closing: the SPA gap you didn’t see, and the damages theory that doesn’t survive scrutiny.
The Acquisition and What Zayo Discovered
Zayo, a publicly traded fiber and data center infrastructure company based in Boulder, Colorado, had built its business through acquisitions — roughly 41 deals since founding, averaging three to four per year. In late 2014, Zayo entered a competitive process run by DH Capital (code-named “Project Caribou”) to acquire Latisys Holdings, a data center colocation and managed hosting provider. Zayo submitted a preemptive bid, pushed for exclusivity, and closed the acquisition in early 2015 at a purchase price of $675 million.
After closing, Zayo discovered that several of Latisys’s largest customers had either not renewed their contracts or had materially reduced their service commitments before the deal closed. The customer churn was significant enough that Zayo believed it had overpaid by approximately $22 million. Zayo sued Latisys for breach of the SPA, arguing that Latisys had an obligation to disclose these customer changes and failed to do so.
Why the SPA Didn’t Cover What Zayo Expected
This is the part of the case that M&A counsel should study line by line. Zayo’s claim rested on Section 4.12(b) of the SPA, which contained representations about “Material Contracts.” Latisys represented that it had not received written notice that any party to a Material Contract intended to “cancel, terminate, materially modify or refuse to perform” such contract.
The problem was scope. The SPA defined Material Contracts by reference to Schedule 4.12, which listed the “Top 30 Customer Agreements” — specifically, Master Service Agreements (MSAs) and related Service Order Forms (SOFs). Latisys’s business operated on a two-tier contract structure: MSAs governed the overall customer relationship, while SOFs specified the particular services, pricing, and terms for each engagement. A customer could let individual SOFs expire or decline to renew them without canceling the MSA itself.
Vice Chancellor Slights found that Latisys had not received written notice of any customer intending to cancel or terminate a Material Contract — because the MSAs themselves remained in force. The customer churn Zayo complained about occurred at the SOF level: customers didn’t renew individual service orders, but they didn’t formally cancel or terminate the overarching MSAs. The SPA’s representations covered the contracts on the schedule. They didn’t cover customer renewal rates, churn, or the likelihood that specific revenue streams would continue.
The court was explicit: the SPA contained no representations or warranties about Latisys’s churn, churn rates, or revenue retention. Zayo, a serial acquirer with deep M&A experience, could have negotiated for those protections. It didn’t.
The Damages Expert Who Used the Wrong Tool
Even if Zayo had established a breach, its damages case had a separate and independent problem: the expert’s methodology. Zayo’s damages expert used an EBITDA multiple to calculate the $22 million overpayment — essentially arguing that every dollar of lost recurring revenue should be multiplied by the transaction’s implied EBITDA multiple to arrive at the damages figure.
The court rejected this approach on two grounds. First, the expert lacked valuation experience. Vice Chancellor Slights noted that the expert’s background did not include the kind of valuation work that would support the methodology he was deploying. Second, and more fundamentally, there was no evidence that the customer churn permanently diminished Latisys’s enterprise value. An EBITDA multiple assumes that the loss is capitalized — that a dollar of lost EBITDA reduces the company’s value by a multiple of that dollar, in perpetuity. But customer churn in a data center business is not necessarily permanent. Latisys could replace departing customers with new ones. The transient nature of the loss didn’t support a permanent-diminution-in-value damages model.
For litigation counsel, the lesson is specific: a transaction multiple is the right damages methodology when the breach permanently and irreversibly impairs the acquired business’s value. When the breach causes a temporary revenue shortfall that the business can recover from through new customer acquisition, the damages measure should reflect the transient nature of the loss — not capitalize it into a permanent reduction in enterprise value. The wrong methodology doesn’t just produce the wrong number. It gets excluded.
The SPA Drafting Checklist
The most useful takeaway from Zayo v. Latisys isn’t about valuation methodology. It’s about what should have been in the purchase agreement and wasn’t. For buyer’s counsel negotiating an acquisition of a contract-dependent business, the case provides a concrete list of protections to consider:
Representations on customer churn and renewal rates. The SPA covered Material Contracts but not the underlying revenue dynamics. If your client’s valuation depends on customer retention, the reps should explicitly address churn rates, non-renewal notices, and pending contract modifications — not just whether the MSA is technically still in force.
Bring-down coverage at the SOF level, not just the MSA level. In a two-tier contract structure (MSA + SOF), the MSA can remain in force while the revenue-generating SOFs expire. If the reps only cover the MSA, you’ve protected against the wrong risk. The bring-down should capture material changes in the revenue stream, not just the existence of the governing agreement.
Interim operating covenants covering customer communications. Between signing and closing, the target should be required to notify the buyer of material customer departures, non-renewals, or contract modifications. If you rely on the reps alone, information that surfaces between signing and closing may fall through the gap.
A clear definition of “material” that captures revenue concentration risk. If the top 10 customers represent 40% of revenue, the definition of materiality should reflect that concentration. A customer non-renewal that individually falls below the materiality threshold but collectively represents a significant revenue loss is exactly the kind of risk the SPA should address.
When You Don’t Need Post-Closing Litigation
The irony of Zayo v. Latisys is that Zayo was a sophisticated, serial acquirer with 41 deals under its belt. It had the resources and experience to negotiate for the protections it later wished it had. It didn’t — and the court was unsympathetic.
If you’re advising a buyer on a contract-dependent acquisition, the cheapest protection isn’t post-closing litigation. It’s pre-closing diligence and SPA drafting. Ask for a customer-level revenue waterfall during diligence. Require reps on renewal rates and pending non-renewals, not just on the existence of contracts. Include interim covenants that require disclosure of material customer changes between signing and closing. If the seller resists those protections, that resistance is itself a data point about what the seller expects to happen with those customers.
A buyer who does this work before closing won’t need a damages expert after closing. And if the seller’s reps turn out to be wrong, the buyer will have a claim that’s actually covered by the agreement — unlike Zayo’s.
The Practical Takeaway
Zayo v. Latisys is a caveat emptor case dressed up as a valuation dispute. The buyer thought it had a valuation problem (it overpaid by $22 million). What it actually had was a contract problem (the SPA didn’t protect against the risk that materialized). The court didn’t reach the valuation question because the breach question came first — and the SPA’s reps simply didn’t cover customer churn.
For M&A counsel, the case is a reminder that the purchase agreement is the first line of defense, not post-closing litigation. For damages experts, it’s a warning: a transaction multiple is the wrong tool when the loss isn’t permanent, and a court will reject methodology that doesn’t match the economic reality of the breach. And for buyers of contract-dependent businesses, the question to ask before closing isn’t “what are the contracts worth?” It’s “what happens to the revenue when those contracts come up for renewal — and does my SPA protect me if the answer is bad?”
