Stacking Up Rackspace Options

Rackspace’s future has been in question since CEO Lanham Napier stepped down in February of 2014. While Rackspace is a profitable company, it must be feeling the squeeze from larger players like Amazon Web Services, Microsoft, and Google. Amazon and Google in particular have slashed prices for their Platform as a Service (PaaS) products, leaving Rackspace struggling to compete. About a month ago, Rackspace’s shares plunged 25% in one day due to a disappointing earnings report with a tepid next-quarter outlook; its stock has lost more than half its value since January.

My own questions about Rackspace’s future were recently answered in its May 15 8-K filing with the U.S. Securities and Exchange Commission (SEC). The company said:

“In recent months, Rackspace has been approached by multiple parties who have expressed interest in a strategic relationship with Rackspace, ranging from partnership to acquisition. Our board decided to hire Morgan Stanley to evaluate the inbound strategic proposals and to explore other alternatives which could advance Rackspace’s long-term strategy. No decision has been made and there can be no assurance that the board’s review process will result in any partnership or transaction being entered into or consummated. The company has not set a timetable for completion of this process and does not intend to discuss or disclose further developments with respect to this process unless and until the Board approves a specific partnership or transaction.”

Now comes the fun speculating about who it is who might be interested in exploring options and opportunities in a partnership with or acquisition of Rackspace. Let me be perfectly clear: I know nothing more than what comes from this announcement and the filing with the SEC. However, based on what Rackspace is and what it does, I have some ideas and thoughts on who might be interested.

The first thing that I have taken into consideration is that Rackspace’s roots are in managed hosting as well as cloud services, but I think what is most important is Rackspace’s work with OpenStack, the computing platform it started along with NASA. Along with Rackspace’s known expertise with OpenStack, whoever acquires Rackspace (if that is what happens) will also obtain a large number of data centers, servers, capacity, and what has been known as “fanatical support.” While Amazon and Google have been slashing prices, Rackspace has been focusing on a greater service-oriented approach.

If you read my last post, you may recall that I spoke about Cisco’s recently announced major initiative to focus on cloud computing, and Cisco is a big fan of OpenStack. Rackspace could easily provide one of Cisco’s immediate needs: the establishment of a strong cloud footprint. This, I believe, makes a great deal of sense for both Cisco and Rackspace.

For my second guess, I am going to switch to another technology giant from the telecommunications industry. Consider that around three years ago, Verizon made news when it entered the cloud market through its purchase of Terremark. CenturyLink also made the plunge, buying Savvis prior to the Terremark purchase, which leaves AT&T possibly looking for a cloud provider to purchase. Consider that the marriages between telecommunications service providers and cloud providers are in some ways matches made in heaven, with telcos providing network infrastructures and cloud providers serving as endpoints. Top that off with AT&T being a corporate sponsor of OpenStack.

I think this is a long shot, but it is worth mentioning Red Hat as a possibility because, like RackSpace, Red Hat has gone all in with OpenStack. I am not quite sold on this concept, however. It might be in Red Hat’s best interest to concentrate on selling its Red Hat licenses and continuing to develop its OpenStack platform.

There are my three top guesses, but it is also important to note that Rackspace might not even get acquired at all; instead, it might evolve into some kind of partnership with other companies, like Twitter and, who knows, maybe even Microsoft. Your guess is as good as mine. It’s time to grab some popcorn and examine the previews for the big show that is coming.

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