Will Anybody Buy Rackspace?

There are recent indications that some of Rackspace's potential suitors may not be stepping up to the plate.

Jul 21, 2014 at 11:20AM

When Rackspace (NYSE:RAX) announced that Morgan Stanley would be helping it evaluate options in mid-May, it was easy to think that such a respected, high-profile company would get snapped up quickly. However, as time has gone on, more potential buyers have given indications that it won't be them. Will Rackspace's demise continue, or will it be acquired by International Business Machines (NYSE:IBM) or Hewlett-Packard Company (NYSE:HPQ), as industry sources have speculated?

Great company, tough market
Rackspace has been the best house, not in a bad neighborhood, but in a war zone. Even if you love the view, it would be tough to pay up for that kind of real estate, which may be what potential buyers of Rackspace are thinking. Rackspace is sitting in the crossfire of Amazon.com, Google, and Microsoft, each with substantially more resources to draw upon than a stand-alone service provider, if a pricing war ensues.

Pricing war rages
Google dropped prices by 50% on average this year, forcing a similar reduction by Microsoft. Amazon was only slightly behind in terms of reductions, which may have only been the case because it was leading the charge last year. Throughout this war, though, revenue is still increasing year over year. It's clear that customers want to work with Rackspace, but if they can get better pricing elsewhere, they will. This has caused operating income growth to plunge on a year-over-year basis.

Has Morgan Stanley produced a bidder?
Shortly after filing weak first-quarter results, Rackspace announced that it would be hiring Morgan Stanley to advise management in evaluating options. This is a step in the right direction, but doesn't guarantee that a bidder will be found. Once Fairfax had a good look at the difficulties the company faced, the $4.7 billion acquisition turned into a syndicated convertible bond private placement. While Rackspace did not ignore its problem for nearly a decade -- the way that Blackberry did -- but it could be facing a similar challenge.

Why are potential acquirers poaching and flaming Rackspace?
Rumors of acquisitions from IBM and Hewlett-Packard have been turning up on industry blogs such as Techcrunch, but if a deal was actually in the making, why would these companies indicate otherwise and poach employees? Re/code recently announced that Mark Interrante, Rackspace's senior VP for products and engineering, joined HP in a move that is a head-scratcher. Why would HP recruit a senior exec from a company that is on its acquisition list? Another head scratcher is why an IBM executive would tell VentureBeat that "the company doesn't have enough technology to warrant an acquisition."

Going private would be a last resort
The rumor du jour is that Rackspace wants to take itself private. If it wasn't in the middle of a price war that would benefit from economies of scale, that might make sense, but the war is raging and lenders of fixed-price debt would likely expect loan shark terms for funding at this time. Are IBM and HP avoiding buying a grenade?

Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

David Eller has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (A shares), Google (C shares), and Rackspace Hosting. The Motley Fool owns shares of Amazon.com, Google (A shares), Google (C shares), International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers