As Rackspace Sells to Apollo for $4.3B, Locals and Cloud Feel Impact

San Antonio—Even though it now has more than $2 billion in annual revenue, Rackspace is a company whose roots are in the nimble startup world. That’s epitomized by a decision in the late 1990s, when the company’s co-founders—Richard Yoo, Dirk Elmendorf, and Pat Condon—transitioned the business from being an Internet service provider and app developer to doing Web hosting.

As we know now, it’s big business to help companies manage the vast amounts of data they use on physical and cloud-based servers. But the information technology landscape has changed, and now Rackspace (NYSE: RAX) faces a slew of competitors offering similar cloud-based services, from Amazon to Microsoft to IBM.

While the company has come up with some ways to make money even as competition rises (more on that later), it announced a deal Friday that may portend its most substantial changes to date: Rackspace is selling to private equity for $4.3 billion. Funds associated with New York-based Apollo Global Management are paying $32 per share to take Rackspace private, according to a statement released today. The board of directors has already approved the deal and the company expects it to close, pending shareholder approval, in the fourth quarter.

Exactly how the business will change under Apollo’s ownership is unclear. Funds associated with another private equity company, Searchlight Capital Partners, have made an equity investment in Rackspace alongside Apollo. The investment firms indicated they plan to keep current Rackspace president and CEO Taylor Rhodes on staff, and want to advise him on the company’s path forward.

“We look forward to working with Taylor and the entire management team and Searchlight to help advance Rackspace’s strategy,” David Sambur, a partner at Apollo, said in the press statement. A media representative for Apollo did not return a request for additional comment.

The acquisition fits in line with public statements that Apollo CEO Leon Black has made recently: the private equity giant is finding lots of attractive deals in a variety of industries. The firm paid $1.6 billion for Outerwall, the owner of Redbox, just a month ago. It is rumored to be bidding for Hewlett Packard Enterprise, according to Fortune.

For Rackspace, the ability to be taken private is appealing, allowing it more flexibility to “manage the business for long-term growth and enhance our product offerings,” Rackspace chairman Graham Weston said in the statement. Weston and Morris Miller, who is now CEO of Xenex Disinfection Services, were early angel investors in (and co-founders of) Rackspace.

For some 300,000 business customers worldwide, Rackspace builds and manages cloud-based IT infrastructures—public, private, or dedicated—that are hosted by its 11 data centers. In recent years, the company has been facing pressure from investments being made in cloud computing by Amazon, Google, HP, IBM, and Microsoft. Amazon emerged with Amazon Web Services, Microsoft with its Azure platform, and Google with its Google Cloud —all aiming to help people and businesses store and process massive amounts of data on their cloud servers.

One way Rackspace has mitigated losing revenue to those larger players is by working with them. It does that through its customer service offering, branded by the company as “fanatical support.”

Coined in 1999 by David Bryce, the former head of Rackspace customer service, the term became an internal rallying point for Rackspace employees—something to motivate them to always … Next Page »

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David Holley is Xconomy's national correspondent based in Austin, TX. You can reach him at dholley@xconomy.com Follow @xconholley

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