Bloomberg News

Rackspace Hires Morgan Stanley to Evaluate Strategic Options (1)

May 16, 2014

Rackspace Hosting Inc. (RAX:US), a provider of cloud-computing services, hired Morgan Stanley to seek strategic options that could include teaming up with bigger technology companies.

The company enlisted the investment bank to explore ways to expand the business, after Amazon.com Inc. (AMZN:US) and Google Inc. cut prices on competing products at a faster pace than expected. The result could be a partnership or acquisition, though there is no timetable, the company said in a statement. Rackspace shares (RAX:US) jumped as much as 22 percent to $37.37, the biggest intraday gain since November 2008.

“Our board decided to hire Morgan Stanley to evaluate the inbound strategic proposals, and to explore any other alternatives which could advance Rackspace’s long-term strategy,” the company said in the statement.

Revenue growth at San Antonio-based Rackspace is on track to slow for a third straight year, even after the company reported first-quarter sales earlier this week that exceeded analysts’ estimates. Graham Weston, who co-founded the company in 1998, took over as chief executive officer in February, when Lanham Napier retired. Weston has been trying to differentiate Rackspace’s services from the cheaper raw-computing alternatives offered by Amazon and Google.

“Our business has always been about more than just renting out access to infrastructure,” Weston said on the May 12 earnings call with analysts. “We add value by managing that infrastructure, as well as specializing in the complex tools and applications that run on top.”

Stock Troubles

Investors have been skeptical. Since climbing to a record in January 2013, Rackspace’s stock (RAX:US) had plunged more than 60 percent as of yesterday, leaving the company with a $4.36 billion market capitalization. The shares were up 20 percent to $36.87 at 9:32 a.m. in New York, the highest in only two months.

Analysts on average expect revenue to rise 16 percent this year to $1.79 billion, according to data compiled by Bloomberg. That’s slower growth than 31 percent in 2011, 28 percent in 2012 and 17 percent last year.

Still, as businesses demand more computing power and storage capabilities in the cloud, Rackspace’s technology is at the heart of the transition. In addition to its vast network of server farms that host and manage client data, the company started OpenStack, an open-source platform that lets any business develop its own private cloud.

Changing Landscape

Gartner Inc. projected the worldwide public cloud-services market would jump 19 percent last year to $131 billion. Traditional business-technology vendors that have struggled to move customers to the cloud could benefit from working with Rackspace.

Mary Claire Delaney, a spokeswoman for New York-based Morgan Stanley, declined to comment.

The competitive landscape is expanding, with Microsoft Corp. investing heavily in its Azure cloud service under new CEO Satya Nadella, and International Business Machines Corp. incorporating technology from its $2 billion purchase of SoftLayer Technologies Inc. last year.

In March, Google cut the price of its key computing-capacity product by 32 percent and lowered its storage offering by 68 percent for most users. Amazon followed immediately by matching many of Google’s prices.

“Cloud computing competition is exploding, with services almost too numerous to count,” according to an April 30 report from Blueshift Research LLC. “Price is a critical point, and Rackspace’s higher price points are keeping it from winning new accounts.”

Weston, 50, is Rackspace’s second-biggest shareholder (RAX:US), with a 13 percent stake, according to data compiled by Bloomberg. FMR LLC, parent of Fidelity, owns about 15 percent.

To contact the reporters on this story: Alex Sherman in New York at asherman6@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net; Mohammed Hadi at mhadi1@bloomberg.net Jillian Ward


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Companies Mentioned

  • RAX
    (Rackspace Hosting Inc)
    • $48.01 USD
    • -0.23
    • -0.48%
  • AMZN
    (Amazon.com Inc)
    • $309.09 USD
    • 6.06
    • 1.96%
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