Monday, May 19, 2014

Who's up for a bit of Rackspace then?

We've all heard the news that Rackspace has hired Morgan Stanley to 'evaluate options' which is generally considered code for find a buyer ... soon. As I've said umpteen times before, Rackspace has been poorly advised in its cloud moves and it looks like it has got itself into a tricky corner being squeezed out of the future by Amazon, Google and Microsoft. This is a pity as I quite like Graham Weston but then the execs that were running the show have IMHO been out of their depth. It didn't have to be this way, alas it was.

Ok, as usual speculations are rife over who should buy and there's a bit of noise e.g. this thread on YCombinator. I thought I'd add a couple of comments to the suggestions.

1) RedHat acquires Rackspace: this is quite a popular one given both companies involvement in OpenStack. It is certainly possible for RedHat to raise any necessary debt to acquire Rackspace and there's been talk of RedHat becoming a service provider in some quarters.

My POV: Great for Rackspace if it happens and suicidal for RedHat. Neither Rackspace nor RedHat are well positioned for the future and so this is akin to a drowning man grabbing another drowning man in the hope of ... drowning faster? It certainly will concentrate a focus on OpenStack with RedHat able to promote a hybrid story but the debt burden, the integration costs, the liabilities, the conflict with any public providers and the make up of Rackspace's revenue are all going to be massively problematic. Despite the suicidal nature of such a move, RedHat has pretty much consistently shown itself to be devoid of good strategic play and so it's probably quite a likely move. I'd score this as possible and hilarious to watch.

2) CISCO acquires Rackspace: Cisco has been involved in OpenStack and has its UCS business to consider which Rackspace also uses. 

My POV: Great for Rackspace, foolhardy for Cisco. On the upside this will provide a good case example, help Cisco to promote a hybrid story and provide lots of opportunity for consultants to talk about synergies between the group. Unfortunately it again depends upon large future for private cloud (a suspect idea), fails to deal with the AWS threat in any meaningful sense, potentially creates channel conflict for UCS and is unlikely to turn around the fortunes of the group. On the upside, Chambers hasn't shown himself to be the great strategist of cloud and so there's a chance that he'll go for it. I'd score this as possible and even more hilarious than Cisco's recent $1 billion on Cloud over two years announcement.

3) Oracle acquires Rackspace:  Oracle has made recent moves towards OpenStack and certainly has the capital and a large enterprise base.

My POV: Great for Rackspace, not so hot for Oracle. Again this doesn't deal with the AWS threat and so is likely to end up a costly exercise. However, there's a lot of inertia out there in more traditional companies and Oracle could exploit this. Oracle is also still trying to find its future in cloud and whilst this won't buy such a future, it will give it some sort of story. Overall, a possible but a sad end to Rackspace. 

4) Amazon or Microsoft or Google acquire Rackspace: Oh, you have to be kidding. Why would they bother? I suppose they could always buy it for data centre floorspace, the existing customer base and some additional engineers. Can't see there being much of a premium on that.

... and on and on.

As for who do I think should buy Rackspace? Well, I suppose I should jump in on the game. There are some interesting names being discussed that have merit e.g. AT&T and Ericsson. But I'd look for the acquisition that is likely to make the most sense in the longer term. In my point of view (POV) that would be :-

5) Reliance Technology (RT part of RIL) acquires Rackspace : RT appears to be working on a public cloud effort in its local regions and this acquisition would provide it an opportunity to extend into the US. It has a fairly credible means for dealing with the AWS threat and every reason to play the game. There is a downside in the recent Oracle API case in the US which would need to be considered but this shouldn't prevent the move. RT has the right people, right mentality and capital needed and Rackspace would provide real estate, some credibility in the US and more engineers. Though the timing is not perfect it is not bad. Overall - well, I don't know if this would happen but it would be a positive and strong move. Though I'd be keeping the acquisition price low and negotiating hard. The current market cap seems much too high in my book given its position in future markets.