Rackspace Stock Sold At 30% Premium
Last month, several readers asked me whether Rackspace Hosting, Inc. (NYSE:RAX) was truly up for sale. There was speculation swirling around RAX stock, but the rumors were far from conclusive so investors were looking for clarity.
At the time, I made myself extremely clear: Rackspace stock was the perfect acquisition target. From my understanding of the industry, owning RAX stock was the smartest thing investors could do at that time. It was clearly going to sell off at a premium…
…and that’s exactly what happened! Late in August, a private equity firm called Apollo Global Management LLC arranged to buy Rackspace stock for 30% above what shares were trading at before the rumor mill started turning.
The deal puts a $4.3-billion price tag on Rackspace ($32.00 per share of RAX stock), ending a remarkable run for one of the earliest players in the cloud computing business.
This company was leasing server space well before Amazon.com, Inc. (NASDAQ:AMZN)—the 800-pound gorilla of cloud computing—even realized there was money to be made in this business.
That being said, Rackspace stock came under serious pressure once Amazon joined the fray. Its subsidiary, Amazon Web Services, quickly took the frontrunner position. As an Internet giant, Amazon already has tons of servers for its own data processing.
Amazon’s existing relationships with vendors gave it infrastructure, not to mention wholesale pricing. That was the ultimate advantage. Companies like Rackspace could never hope to counter Amazon’s lower prices, at least not while remaining independent.
RAX Stock Was a Quick, Short Play
That’s how I knew the rumors were true; second-tier firms are always acquisition targets during periods of market consolidation. Some weaker players simply go under, but my analysis showed that a buyout was the obvious end for RAX stock.
The same analysis suggests that this purge will be decided by market cap. Only companies like Amazon Web Services, Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc (NASDAQ:GOOG), and International Business Machines Corp. (NYSE:IBM) have the scale to outlast and under-price the competition.
And since the ability to lowball the competition is crucial in a tough economy, the rest will either be acquired or obliterated. Rackspace has brand-name recognition and goodwill with markets, so I didn’t think it would be obliterated.
An acquisition was the only logical end-game.
The company was desperately trying to rethink its business. Part of the strategy focused on cloud management services, but it was still a big shift to pull off while trading on a public exchange. Taking the company private is a wise move.
Without the see-saw of millions of investors, companies have the freedom to achieve significant change in a short period of time. My guess is that after reworking Rackspace stock as a niche player, Apollo Global Management will sell it to a major cloud computing firm.
In the meantime, however, RAX stockholders walk away with an easy 30% return. Considering the trade only lasted one month, that’s an incredible turnaround. Investors should keep an eye out for opportunities that follow this pattern, because the tech industry is entering a period of consolidation. Small- to mid-size stocks are poised for massive gains as bigger firms eye them as takeover targets.
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