Rackspace Hosting Nears Sale to Private-Equity Firm -- Update
August 04 2016 - 7:48PM
Dow Jones News
By Dana Cimilluca, David Benoit and Dana Mattioli
Rackspace Hosting Inc. is nearing a sale to a private-equity
firm, two years after the cloud-computing company said it would
explore a deal amid heightened competition in the fast-growing
market.
The San Antonio-based company is in advanced talks with one or
more private-equity firms, and a deal could be reached as soon as
this week, according to people familiar with the matter.
Rackspace had a market value of $3 billion on Thursday afternoon
before The Wall Street Journal reported on the possible sale,
meaning that with a typical takeover premium, the company could be
valued at as much as $4 billion.
Rackspace is a provider of cloud services, which allow users to
tap remote servers for storage and expanded computing power and
have exploded amid the surge in mobile usage. The company has
shifted its business model in recent years, amid stiff competition
from larger technology companies such as Amazon.com Inc. and
Microsoft Corp., and is now more of a services provider offering
bundled computing and support.
In 2014, the company said it had hired bankers to help evaluate
expressions of interest. Later that year, Blue Harbour Group LP
disclosed a sizable stake in Rackspace.
Today, the activist investor is among the company's largest
shareholders, with a stake of more than 9%.
At $4 billion, the company would still be valued well below what
it was worth just a few years ago. Rackspace shares traded at about
$31.50 each after hours, after surging more than 30% on the report.
In early 2013, they changed hands at nearly $80.
Last year, Rackspace and Amazon, once fierce rivals, unveiled a
partnership in which Rackspace would help make it easier for
corporate customers to move computing operations from their own
facilities to Amazon Web Services, the web-retailing giant's cloud
platform. Rackspace also has a similar partnership with
Microsoft.
Amazon Web Services has been growing at a blistering pace,
registering a 58% year-over-year revenue gain to $2.89 billion in
the most recent quarter, the company said last week. The unit
appears on track to exceed Amazon Chief Executive Jeff Bezos's goal
of reaching $10 billion in sales this year. The business is a key
pillar of Amazon's growth and has become the go-to provider for
startups, many government agencies and some large corporations.
A partnership between Rackspace and Amazon would have been
unthinkable just a few years earlier, but in early 2014, Rackspace,
facing ever slimmer margins amid a cloud-computing price war,
withdrew from head-to-head competition with Amazon. Since then, its
focus on offering higher-margin services has helped boost the
company's cash flow from operations -- a metric private-equity
firms closely follow and which hit $156 million in the first
quarter. Last year, Rackspace had $122.4 million of net income on
revenue of $2 billion, increases of nearly 14% and 12%,
respectively.
The company is expected to report second-quarter results
Monday.
The idea for Rackspace began in 1998 by three college
classmates, according to the company's website.
Technology has been the most active sector for deal making so
far in this year. There have been more than $404 billion of deals
in the industry, representing about one-fifth of overall deal flow,
according to Dealogic.
Last month, Oracle Corp. agreed to buy NetSuite Inc. for $9.3
billion. In June, Microsoft Corp. agreed to buy professional social
network LinkedIn Corp. for $26.2 billion.
--Matt Jarzemsky contributed to this article.
Write to David Benoit at david.benoit@wsj.com and Dana Mattioli
at dana.mattioli@wsj.com
(END) Dow Jones Newswires
August 04, 2016 19:33 ET (23:33 GMT)
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