Rackspace: Can it outrun customer uncertainty as CenturyLink, others eye acquisition?

The Rackspace "strategic alternatives" process needs to be resolved as soon as possible or landing deals may become more difficult.

Rackspace is on the block for a joint venture or outright acquisition and potential buyers continue to leak. The problem? The Rackspace "strategic alternatives" process needs to be resolved as soon as possible or landing deals may become more difficult.

According to Bloomberg, CenturyLink is looking at Rackspace as a potential acquisition, but the odds are a coin flip at best. For CenturyLink, a sprawling telecom that has bulked up via acquisitions of Qwest, Savvis, AppFog and Tier 3, Rackspace would give the company some cloud and hosting knowhow. Verizon's acquisition of Terremark was a similar purchase.

CenturyLink and Rackspace would be a strategic fit, but the price tag may be too high. And now Rackspace is getting a bit of an acquisition premium its market cap is north of $5.6 billion. Rackspace said in May that it was exploring strategic alternatives.


Since Rackspace started evaluating offers, management has done a nice job of delivering solid returns and refocusing the company on higher-margin cloud operations. Rackspace made a strategic blunder by trying to take on Amazon Web Services directly and was hosed. In July, Rackspace introduced a new pricing model that separated infrastructure from support and is confident it can avoid the fray.

On Aug. 11, Rackspace president Taylor Rhodes said:

More and more companies are moving out of the notion of I should do all that myself and moving into the notion of I want to go to somebody who does that for a living who has expertise at scale to manage those for us. And I think also you are just seeing the evidence points shape up that there is a different market. There is a very different market between what AWS and Google are selling which is unmanaged cloud and what we're selling which is managed cloud.

According to various research reports, Rackspace still sees AWS as a primary competitor, but life is becoming more difficult because of Google competition. AWS vs. Google only helps Rackspace a bit though. Referring to management meetings in London, Wells Fargo analyst Gray Powell said "in every meeting, Rackspace received questions around the company's May 8K on strategic alternatives."

Rackspace's second quarter results were strong, but CEO Graham Weston said the company couldn't discuss the timetable to evaluate offers. Here's the rub: The longer the process takes the more challenging it'll be to land long-term high value managed cloud deals as well as keep employee morale up.

The questions about Rackspace's future are only going to ramp. Rackspace held a cloud powwow called Solve in San Francisco July 28 and will take its tour to New York and Chicago in the weeks to come.

Bottom line: Rackspace could be a great asset for the right telecom provider or even VMware, but the company still faces an uphill battle vs. AWS, Google, Microsoft and IBM on some level.


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