Rackspace Hosting, Inc.
) surged 6.3% after TechCrunch reported that it was likely to go
private. In May, Rackspace hired
) to evaluate its strategic options.
Reportedly, at least three companies, including
International Business Machines Corporation
) have expressed their interest in acquiring the cloud computing
company. Hewlett-Packard offered $43.0 for each Rackspace share, at
a premium of approximately 20.0% over its Jul 2 closing share
price. The talks with IBM have apparently fallen through and not
much is known of the third suitor.
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 (mainly SMB),
managing more than 103K servers. It has a strong balance sheet with
net cash of $313.8 million as of Mar 31, 2014.
Rackspace's focus on a hybrid cloud computing environment makes it
an attractive acquisition target, in our view. Hybrid clouds
comprise features of both public and private clouds 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 will adopt
hybrid clouds by the end of 2017.
However, competition in the Infrastructure-as-a-Service (IaaS)
market is intense, particularly with players like Amazon that are
willing to price very aggressively and behemoths like Microsoft and
Google, which are determined to build a position in the
fast-growing segment. The increasing competition has impacted the
company's profitability. In 2013, Rackspace reported earnings of 61
cents per share, which declined 18.7% from 2012.
While we think that there are pros and cons to both the takeover
and going-private options, investors are clearly rooting for the
Currently, Rackspace has a Zacks Rank # 2 (Buy).
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