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Rackspace acquisition positions company for more managed services

The Rackspace acquisition by Apollo Global Management will make the company privately held and infuse it with cash to double down on its strategy around managed services.

The two-year suspense Rackspace users have endured about the company's future direction has ended with an acquisition...

and a move to double down on its managed cloud services.

The San Antonio-based company said it had entered an agreement to be acquired by investment firm Apollo Global Management LLC for $4.3 billion. The move ends years of rumors about a Rackspace acquisition and being bought by a larger tech company, and it allows the vendor to follow the path of companies -- such as Dell -- that have pulled out of the publicly traded market to institute more long-term planning.

A lot of investors clamored for Rackspace to load up on debt to expand its business, but it has generally been long term in its thinking, said Lydia Leong, vice president and distinguished analyst at Gartner. This move allows Rackspace to continue its move away from owning infrastructure and to become more of a broad third-party management company, Leong said.

"It's easier to make the business transition out of the public eye and to not have that quarter-to-quarter scrutiny," Leong said.

DigitalFilm Tree, a post-production software and process consulting company based in Los Angeles, was a heavy Rackspace user for its hosted environments, but it has started to use more Amazon Web Services (AWS), as the industry moves more toward Amazon and, to a lesser extent, Google Cloud Platform, said Guillaume Aubuchon, DigitalFilm Tree's CTO.

News of this deal and Rackspace's continued de-emphasis on public cloud will likely push all of its public cloud resources to AWS. DigitalFilm Tree, which also runs its own OpenStack private cloud, was hesitant about AWS at first, but the Rackspace support helped. And DigitalFilm Tree may look to use even more of that AWS support if it moves more resources to that platform, Aubuchon said.

"That was always the strong suite of Rackspace from the beginning … their ability to manage and support infrastructure, so absolutely we would continue to use them in support of AWS," Aubuchon said.

Rackspace co-founded OpenStack, the open source cloud infrastructure project, with NASA six years ago, and it built public and private cloud services with the technology. OpenStack still has sizable vendor support, but momentum around the software has waned, while proprietary public clouds, such as AWS, have seen exponential growth.

Rackspace operates the largest OpenStack public cloud, though it has de-emphasized the platform, as it redirected its efforts to support other platforms, such as AWS and Microsoft Azure.

"For Rackspace, the game was written on OpenStack some time ago when they decided to do more managed services for third parties," Leong said. "They're still investing in OpenStack public cloud, but they're not dependent on it for the future."

The move away from being publicly traded could, however, help expand Rackspace's hybrid strategy and continued push around managed private cloud, said Molly Gallaher Boddy, research analyst at Technology Business Research Inc., in Hampton, N.H. It can take time to realize the real value in this type of business model, because private cloud and managed services don't post the same impressive revenue and growth results as public cloud.

It's easier to make the business transition out of the public eye and to not have that quarter-to-quarter scrutiny.
Lydia Leongvice president and distinguished analyst at Gartner

"Having this real managed private version of OpenStack appeals to certain groups of customers who want higher-touch help in their use of private cloud to begin with," Boddy said.

Rackspace shareholders will receive $32 per share, the company said. Rackspace stock has fallen precipitously since it peaked at nearly $79 a share in January 2013. At the time, some industry observers even viewed the company as a potential competitor to AWS, though it never had nearly the same kind of resources as AWS and never truly became a legitimate competitor to the market leader.  

The transaction is expected to be completed in the fourth quarter of this year. Searchlight Capital will make a "strategic equity investment" in Rackspace, including the assumption of $43 million of net cash, the company said in a statement.

Going private, as compared with being bought by another tech vendor, allows Rackspace to keep its leadership team and culture, and to make "tougher decisions that are not necessarily popular in the eyes of the public market," said John Engates, Rackspace's CTO.

"Sometimes, they want things done quickly, or so they don't have a negative impact on the stocks. But as a private company, you get to make a lot of decisions without that scrutiny," Engates said. "I'm excited about those kinds of differences."

A data center footprint

There will still be a need for a data center footprint for services such as hosted VMware or hosted private OpenStack, and there will likely be some workloads that will never go to the cloud, but much of the company's investment now is on humans and technology, not servers and floor space, Engates said.

"Some portion of our future business is going to be in someone else's facility, but some portion will continue to be in our own, and it may be about getting good at sorting out what goes where for our customers," Engates added.

There's been little disclosed about where the investments from going private will be spent, so it will be interesting to see how Rackspace expands its management strategy -- whether that's offices closer to its customers, or hiring employees with certain expertise, said Lauren Nelson, an analyst with Forrester Research.

"It certainly is not always smooth sailing," Nelson said. "If you look at other organizations that got acquired, it hasn't been all sunshine, and it's certainly a transition period for trying to figure out what the future is."

Still, it's a potentially better situation than other companies that get absorbed into large tech firms and are either shut down or forgotten a couple years after being bought, so it's a relative positive that Rackspace will be able to keep its own brand and strategy, Nelson said.

Trevor Jones is a news writer with TechTarget's Data Center and Virtualization media group. Contact him at [email protected].

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