In a recent 8K filing,
) 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
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
), Google and
) 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
) 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
Currently, Rackspace has a Zacks Rank # 2 (Buy).
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