Rackspace Hosting (f/k/a RAX)

[Belek]

HEARD ON THE STREET
Rackspace Shouldn't Be Left on the Rack




By DAN GALLAGHER
May 18, 2014 5:54 p.m. ET
Outgunned in the cloud wars, Rackspace Hosting RAX +17.73% could use a partner with a bigger arsenal.

A 61% drop in the stock in the 18 months up to Friday has drawn predictable interest. Rackspace said late Thursday it had been "approached by multiple parties" about either a partnership or an acquisition. It has hired Morgan Stanley MS +1.24% to advise. Rackspace's stock jumped 18% on Friday.

Putting Rackspace in play will set off speculation around firms such as Cisco Systems, CSCO +0.79% Hewlett-Packard HPQ +0.34% and Dell. All three want to make inroads into the cloud business with their products and could find it beneficial to pair up with a service provider like Rackspace.

Rackspace's business is still expanding, but earnings are under pressure as large, deep-pocketed rivals including Amazon.com, AMZN +0.85% Google GOOGL -0.15% and Microsoft MSFT +0.58% have been cutting prices for their own cloud services. Rackspace's net income fell nearly 18% in 2013, the first such decline in six years, despite a 17% revenue increase.

Rackspace focuses on firms that lack the expertise to take advantage of services offered by the likes of Amazon and are willing to pay a premium. A bigger, diversified company able to absorb the inevitable price declines with profits from other businesses would make a natural partner.

Rackspace wouldn't come cheap, though, with a market value of $4.4 billion. This is doable for a company such as Cisco, which has about $50 billion of cash. But a deal would still have to be justified to shareholders who may be worried about Rackspace's future in a highly competitive market.

Rackspace's investors can reasonably hope, though, that this won't prevent a buyer from being found. As some of them no doubt know from bitter experience, getting into the cloud business isn't cheap for anyone.

Write to Dan Gallagher at [e-mail]