Recent Drop in Rackspace (RAX) Shares Could Bring in Some Bids
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How great would it feel to acquire Rackspace Hosting (NYSE: RAX)?
For AT&T (NYSE: T) or Dell (Nasdaq: DELL), that's a question which has likely been considered recently.
A formidable provider of cloud-based storage, Rackspace trails only Amazon.com (Nasdaq: AMZN) in allowing companies to store data on servers and access them via the Internet. And for prospective investors, Rackspace shares trade at a much more affordable multiple.
According to Bloomberg, Rackspace has 180,000 business customers who store websites and other data on its servers. Recently Rackspace started moving cloud services to its open-source project OpenStack -- a project which is backed from a little GSE called NASA, allowing it to free up some internal resources. What will those resources be used for? Broader international expansion, a move Rackspace hadn't really focused on in the past.
In the U.S., Rackspace technology is being utilized by the big names mentioned above. AT&T is being pegged as the most likely to make a bid for Rackspace, as it's trying to steal customers from Amazon Web Services with its AT&T Cloud Architect offering. AT&T's cloud is already running on OpenStack.
The other possible suitor is Dell, which recently bought Wyse Technology and has been focusing more on pushing into the cloud environment. Rackspace is already using Dell hardware for its storage centers, meaning the two would have plenty of synergies.
Rackspace shares have fallen 22 percent since reporting earnings on May 7th: the company topped sales views with an 88 percent year-over-year increase, but EPS of 17 cents missed estimates.
What do the numbers say? Rackspace is boasting an enterprise value (market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents) of $6.1 billion, or 18 times EBITDA. That's more expensive than most of its competition, but trails Amazon, which has EV-to-EBITDA at about 47 times.
Bloomberg says Rackspace isn't likely to sell for any deal under 13 times next year's EBITDA expectations. At $606 million, a potential deal would be around $7.9 billion, a 30 percent premium from Tuesday's closing market cap.
One question being asked is whether the premium will be justified. For businesses, the decision comes down to whether or not they would want to build their own cloud or simply license storage and accessibility from a well-known name in the industry. For many it's a no-brainer: license the storage. For just pennies per hour, it makes sense in the long run.
And that logic is making a strong case for Rackspace. Despite the chatter, Rackspace shares are lower Wednesday morning.
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For AT&T (NYSE: T) or Dell (Nasdaq: DELL), that's a question which has likely been considered recently.
A formidable provider of cloud-based storage, Rackspace trails only Amazon.com (Nasdaq: AMZN) in allowing companies to store data on servers and access them via the Internet. And for prospective investors, Rackspace shares trade at a much more affordable multiple.
According to Bloomberg, Rackspace has 180,000 business customers who store websites and other data on its servers. Recently Rackspace started moving cloud services to its open-source project OpenStack -- a project which is backed from a little GSE called NASA, allowing it to free up some internal resources. What will those resources be used for? Broader international expansion, a move Rackspace hadn't really focused on in the past.
In the U.S., Rackspace technology is being utilized by the big names mentioned above. AT&T is being pegged as the most likely to make a bid for Rackspace, as it's trying to steal customers from Amazon Web Services with its AT&T Cloud Architect offering. AT&T's cloud is already running on OpenStack.
The other possible suitor is Dell, which recently bought Wyse Technology and has been focusing more on pushing into the cloud environment. Rackspace is already using Dell hardware for its storage centers, meaning the two would have plenty of synergies.
Rackspace shares have fallen 22 percent since reporting earnings on May 7th: the company topped sales views with an 88 percent year-over-year increase, but EPS of 17 cents missed estimates.
What do the numbers say? Rackspace is boasting an enterprise value (market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents) of $6.1 billion, or 18 times EBITDA. That's more expensive than most of its competition, but trails Amazon, which has EV-to-EBITDA at about 47 times.
Bloomberg says Rackspace isn't likely to sell for any deal under 13 times next year's EBITDA expectations. At $606 million, a potential deal would be around $7.9 billion, a 30 percent premium from Tuesday's closing market cap.
One question being asked is whether the premium will be justified. For businesses, the decision comes down to whether or not they would want to build their own cloud or simply license storage and accessibility from a well-known name in the industry. For many it's a no-brainer: license the storage. For just pennies per hour, it makes sense in the long run.
And that logic is making a strong case for Rackspace. Despite the chatter, Rackspace shares are lower Wednesday morning.
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