According to TechCrunch this morning, faced with the twin options of going it alone or tying up with a tech giant with deeper pockets, Rackspace just may pick door number three. The company’s board is reportedly taking a serious look at simply going private, with the help of private equity of course, and they could even make the announcement this week.
The immediate attraction of going private is pretty obvious to those who follow internet infrastructure. The public markets don’t really understand the sector, and thus aren’t comfortable with longer term plans and capital intensive businesses that might cut into next quarter’s growth or, even worse, dividends. Private equity does, which is why they have been buying up fiber networks and other assets across the space for years now at multiples higher than public markets have been willing to give.
On the other hand, the longer term problems Rackspace faces are not made much easier by taking short term public scrutiny out of the picture. The likes of Amazon, Microsoft, and Google have more scale and resources than any private equity group is going to throw into the hopper after a commoditized product set. If Rackspace doesn’t join up with a strategic buyer that can, then they’re going to have to pivot to a new model.
But then, we’ve seen what happens when a public company pivots in this industry to a plan that will take years to bear fruit. A few quarters of churn is all it takes to get pummeled into submission by the markets, which is perhaps why Rackspace’s board is wishing they were privately held. They might still sell out to an IBM or HP or CenturyLink, but without a public market sword hanging over their heads they might have a few more options and thus a stronger hand to play M&A poker with in a few years.
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Categories: Cloud Computing · Datacenter · Mergers and Acquisitions
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You make a good point about the public markets not getting it. It always drove me crazy when an established tech company or telco would present to investors some radical new ideas about how to transform the business instead of churn along and commoditize further, and their response was always:
“meh, whatever… say, when are you going to add more sales reps, when will they be active, and whats the ROI on the last million square feet you added? And what percentage have you shaved off your opex this quarter?”