Rackspace Surges on Buyout Rumors - Analyst Blog


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In a recent 8K filing, Rackspace Hosting ( RAX ) announced that it has been approached by a number of companies to build strategic relationships including an outright buyout. The company recently hired Morgan Stanley to evaluate the various strategic proposals.

However, Rackspace did not disclose the names of the suitors in the filing. The company also did not set any specific time frame to complete the process. Shares of Rackspace surged a massive 7.73% ($5.44) to close at $36.12 per share on May 16 following the news.

However, prior to the 8K filing, Rackspace shares were down approximately 19.0% year-to-date making it an acquisition target.

Rackspace leases server space and helps enterprises store and access data in the cloud. In fiscal 2013, the company reported net revenue of $1.5 billion and served 200K customers managing more than 103K servers.

However, cutthroat competition from the likes of Amazon.com ( AMZN ), Google and Microsoft ( MSFT ) dented its profitability. In 2013, Rackspace reported earnings of 61 cents per share, which declined 18.7% from 2012.

Reportedly, Cisco, Hewlett-Packard, Google, Amazon.com, EMC, VMWare, Red Hat and Dell have shown keen interest on acquiring or building strategic alliance with Rackspace, which will significantly expand their foothold in the Infrastructure-as-a-Service (IaaS) market.

Rackspace's focus on offering a hybrid cloud computing product makes it an attractive acquisition target, in our view. Hybrid clouds comprise features of both public and private cloud and are much more secure than public clouds.

Per Technavio, the global hybrid cloud market is forecast to grow at a compound annual growth rate of 30.2% during 2013-2018. According to Gartner, 50.0% of mainstream enterprises are expected to adopt hybrid clouds by the end of 2017. This presents a significant growth opportunity for Rackspace, going forward.

However, intensifying competition from the likes of VMware, International Business Machines ( IBM ) and Microsoft is a major headwind, considering their scale of business.In such a scenario, we believe that an acquisition will be much more beneficial for Rackspace investors compared to a strategic partnership.

Currently, Rackspace has a Zacks Rank # 2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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