Rackspace's public struggles may lead to private move

Rackspace is expected to go private this week, rather than continue its search for a suitor. It may not help the company compete in the cloud market.

After weeks of speculation about the future of Rackspace, the company may go private.

A month after an SEC filing by the company revealed it was contacted by multiple parties interested in a partnership or acquisition, Rackspace is reportedly going private rather than accept an acquisition bid.

One source who claims to be familiar with Rackspace's plans to go private said the move may happen this week.

For publicly held Rackspace, which has struggled to compete with major cloud vendors such as Amazon Web Services (AWS) and Microsoft Azure, the move to go private could make sense, analysts said.

"They do not have a differentiated strategy today," said Judith Hurwitz, president and CEO at Hurwitz and Associates, a research firm based in Needham, Massachusetts. "If Rackspace were to go private, they would have the ability to come up with a new strategy that could potentially make the company more successful."

Rackspace trails AWS, Microsoft, CenturyLink and CSC for cloud infrastructure as a service, according to Gartner Inc.'s latest Magic Quadrant. Rackspace was positioned in the challengers quadrant, a slip after being named a leader in 2013.

Going private would "allow them to build out a strong story for their managed cloud vision, rather than spending time integrating their offerings with an acquirer's existing cloud services," said Dave Bartoletti, analyst with Forrester Research Inc. in Cambridge, Massachusetts.

A Rackspace spokesperson declined to comment.

Following in Dell's footsteps

The decision to go private would be momentous and would give Rackspace significant advantages, according to Carl Brooks, an analyst with 451 Research in Boston.

Going private would be a bit of an 'up yours' and a relief to management, too.
Carl Brooksanalyst, 451 Research

The situation is similar to Dell's move to become private in October 2013 after suffering with Wall Street despite solid revenue figures and a robust strategy. Going private would allow Rackspace to shift its marketing and operating strategy much more quickly and make independent decisions about capital expenses.

"When you're public, you're kind of hamstrung by having to meet quarterly expectations," Brooks said. "It's a very onerous process for a company that's just trying to get stuff done and execute on a strategy."

The company's market cap is more than $5 billion and reported first quarter earnings of $421 million, up 3.2% from the previous quarter and 16% from the first quarter of 2013. Despite consistent revenue growth, the company's stock had been on a steady decline since a high of more than $78 per share in January 2013.

Shares rose again after the SEC filing, but speculation about a lack of suitors drove down prices last week, only to soar back over $36 per share when reports of its private future became public.

Going private could be freeing for a company that has dealt with the slings and arrows of not doing standardized marketing and not maximizing profits in the short-term, Brooks said.

"Going private would be a bit of an 'up yours' and a relief to management, too," Brooks said. "The upper management team would probably be doing a jig on a pile of burned bonds."

Can a private Rackspace succeed?

How Rackspace would rebuild itself is unclear, but being a private company would certainly give it more breathing room.

"Going private will take them out of the glare of the financial analysts," Hurwitz said. "However, as a private company, they will need to work hard to get noticed and gain visibility and importance with customers in the market."

The question for Rackspace as a private company would be what it could do differently that it could not in the public eye.

"Like many other [companies] deciding to go private, Rackspace now has the opportunity to regroup and formulate its strategy going forward," said Holger Mueller, analyst with Constellation Research Inc. in Monta Vista, California. "We will have to see how [Rackspace] will emerge from this phase. And see what will be the platform for growth for the next five to 10 years."

Rackspace will have to do more to stay competitive and relevant in the fast growing and shifting cloud market, he said.

"Going from being a leader to 'one of the players' in two to three years is the challenging scenario the management team now faces and needs to address, sooner or later," Mueller said.

Whether Rackspace is private or public, its competition will be there.

"Going private... would let them get the market off their backs for a while," Bartoletti said. "It would still leave them in a highly competitive cloud services space, and they will still have plenty of OpenStack-based public cloud competitors."

Executive Editor Ed Scannell contributed to this report.

Adam Hughes is a News Editor with TechTarget. He can be reached via email at ahughes@techtarget.com or on Twitter at @AdamHughesTT.

Trevor Jones is the news writer for SearchCloudComputing. You can reach him at tjones@techtarget.com.

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